Focus switches back to macro but politics on the horizon

Although the focus will be the global flurry of macro economic data released at the start of this month, politics is still a cause for concern. An opinion poll commissioned by the Times found that the Conservative lead over Labour is now only three points, that is within the margin of error. Thus, if this opinion poll is to be believed, there is a real probability that Labour could win next week.

The impact of the latest poll has been relatively muted, and is mostly being felt in the pound, which has backed away from Wednesday’s high at 1.2920. In contrast, bond yields and the FTSE 100 are showing no signs of election jitters, the FTSE 100 is expected to open higher and UK 10-year bond yields are higher, reversing some of the losses from earlier this week.

Divided pollsters supressing UK asset price volatility

At this late stage of the UK election campaign, the pollsters are more divided on the size of the Conservative Party’s lead than at any other time during the election. This makes the outcome even harder to predict, and makes it difficult to price in the potential impact from the election result ahead of time. Polling analysts note that a lot of support for Labour has come from younger people who tend not to vote, so who knows what will happen on June 8^th.

We continue think that the market is expecting Theresa May and the Conservatives to win the general election. 1-month at the money volatility for GBP/USD has moved a little higher, but is still at the same level as April, while GBP/USD 1-month risk reversals do not suggest that there are a wave of bearish bets for sterling right now. This explains the 1.2750-1.30 range for GBP/USD leading up to this election, which hardly suggests panic stations. The FTSE 100 attempted to make a record high on Wednesday, although it failed at that endeavour, and the 10-year UK Gilt yield, although retreating, has found support at the critical 1% level. The UK Gilt yield has dropped by approx. 20 basis points over this election campaign, which again suggests that election risks are not impacting the bond investor, yet 

What if nothing changes?

Perhaps the market is underestimating the risks from this election, and the prospect of a Labour manifesto that claims to nationalise UK utilities and the Royal Mail, the latter is up 10% in the last month, has been virtually ignored by investors. We will analyse the potential impact of a Labour win for UK corporates later this week. However, we have a sneaking feeling that the market actually expects a pretty similar election result to what we have today, which would leave things virtually unchanged. This is looking like an increasingly likely outcome, if you average the polls; hence the muted response from the market is hardly surprising.

Data watching…

The next two days could shift the focus to the macro economic data. Highlights include: UK manufacturing PMI, US manufacturing ISM and the ADP employment report, ahead of US payrolls and unemployment data due on Friday. We have seen some synchronisation in global growth, with strong economic data, particularly employment data, in the US and in Europe, which can be a powerful driver for stocks. Thus, if we see another strong month of data this could bode well for risky asset prices, regardless of pesky election outcomes.

The financial sector a cause for concern for global stocks

However, there are headwinds for stock prices. The first is the financial sector. In the US financials have had a poor week, after some banks said low volatility in Q2 could supress profits. Also a flattening of the US yield curve is also weighing on the banks, and Goldman Sachs was the worst performer on the Dow on Wednesday. This could spread across the Atlantic and hit the FTSE 100, where the financial sector is more than 20% of the overall index.

The decline in oil prices is another cause for concern, but maybe not in the short term. Although the decline in US stockpiles was supportive of the oil price late on Wednesday, crude prices have had a torrid week, and remain vulnerable to further declines. However, today we expect the sharp bounce in the oil price overnight to support the index, and futures point to a strong open for the FTSE 100 later and potentially another stab at a record high. At this stage of the rally, investors should take nothing for granted, as pride cometh before the fall.