UK Local Elections: Stay bullish on GBP
(by Peter Rosenstreich)
Noise around the UK local council elections highlights the fact that in today's lightning-fast media cycle not every election matters equally.
Pundits are trying to make the case that a wide victory by PM Theresa May's Conservative Party suggests a sweeping victory in the General Election on June 8. But we suspect that this latest vote is more focused on local issues and less about Brexit. Making an extrapolation to broader voter sentiment is difficult, especially given a low turnout.
Yet in the short-term, why not trade in the sentiment. A solid showing by the Conservatives should equal a chance of a significant majority in the national vote next month. Should May receive such an electoral mandate, this should empower the UK's position heading into UK-EU Brexit negotiations. We would fade the hype and continue to believe the current harsh rhetoric (£100bn divorce bill) does not represent the probable end result after the negotiations.
UK fundamentals remain solid as composite PMI data suggests strong 2Q growth momentum (April rose to 56.2 from 54.8 above 54.5 expected) but we recognise that PMI did over predict 1Q growth performance. Predictions of a seizing up in consumption behaviour by households and/or businesses have not occurred.
Finally, devaluation of GBP continues to deliver dividends for exporters and manufacturing. We therefore remain bullish on GBP especially against the EU and JPY.
French Elections: One risk in parliamentary elections
(by Yann Quelenn)
While there were (small) uncertainties before the second round, the debate has now turned towards the advantages of Emmanuel Macron, who remained very calm and detailed in his program. Marine Le Pen was expected to detail her economic plan as feasibility it is often questioned, but she failed to inspire confidence on that.
The polls are still showing a strong Macron victory and after the debate, we really don’t see how Marine Le Pen could win. The likelihood of a victory for her is very slight and the glass ceiling won’t be broken.
The euro should not move much amid the French election. It is now going to be time to think about the third round - the parliamentary election - and there’s one risk there.
Under the “En Marche” banner of Macron, there will certainly be a lot of socialists and French people are now reluctant to vote for them. So we remain suspicious that Macron will get a majority at the parliament.
We remain bullish though on the single currency at least in the medium-term. A small relief rally may intervene on Monday. Attention will now shift back towards the ECB for the June meeting.
Crude oil hits five-month low
(by Arnaud Masset)
After free-falling to $43.76 during the Asian session, June West Texas Intermediate crude future contracts consolidated slightly below $45 a barrel, down 1.40% since Thursday's close.
The oil rout speeded up this week as clouds continued to gather on the horizon. Investors started to question the future of OPEC’s output deal, while US inventories remain elevated (527.8mio barrels, excluding strategic reserve, as of April 28th).
The market is currently looking for further weakness in crude oil prices and will almost surely find some. We actually see two main reasons for a lower oil. First, the OPEC strategy, which was aimed at squeezing out the US shale industry, was a huge failure as US producers were able to lower their break-even price and continue to pump.
Secondly, the market is still positioned on the bullish side as net non-commercial positioning, reported by the CFTC, stands at around 19% of total open interest. This cannot be viewed as extreme positioning but it nevertheless indicates that the risk is biased to the downside.
The $42 support (low from mid-November last year) is the key level to monitor as a break of the latter will accelerate the sell-off. In the short-term, we expect crude prices to stabilise but we remain positioned for further weakness.