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S&P Futures At Record High After “Shocking” UK Election Result

Courtesy of ZeroHedge. View original post here.

“Triple Threat Thursday” is now a distant memory, with both the ECB and Comey testimony “non-events” for the market, although the UK general election was a shocker in which contrary to expectations, Theresa May lost her majority in Parliament, sending sterling tumbling overnight and prompting even more confusion about the UK’s political fate and the future of Brexit. That however did not spook risk assets, and on Friday morning, European stocks gained with Asian stocks little changed, while S&P500 futures were set for new all time highs. Just like after Brexit, it was U.K. stocks that rallied the most among developed markets as the pound fell.

With the majority of seats counted, May’s Conservatives had no way to win an outright majority in parliament. That raised fears the political turmoil could delay and confound talks on leaving the European Union, which are due to start in less than two weeks, and the pound shed over 2 percent against the dollar.

Sterling dropped as low as $1.2636 in early London trading, before clawing back some ground. Yields on 10-year gilts fell 3 basis points to 1.00 percent. However, the damage contained, with S&P futures edging up 0.2 percent to 2,434, and just shy of record highs.

“The uncertainty is bad news for sterling,” said Bank of America, Merrill Lynch European equity & cross-asset strategist James Barty. “I think for the global market it doesn’t matter. Unlike Brexit, which at the time had a spillover into other markets, this is a very UK-specific thing.”

Most impacted by the UK result was the pound, which plunged the most in eight months as the election intended to strengthen Prime Minister Theresa May’s hand in negotiations with the European Union instead cast doubt over her future. The currency’s retreat gave British stocks a boost, but the election’s impact beyond the U.K. was muted.

The euro extended losses to three days, and the Stoxx Europe 600 Index swung. Fears of a supply glut continue to weigh on oil, but it managed to reverse an earlier decline.

“For now, the results of U.K. elections do not appear to be threatening the global growth story,” Mark Haefele, global chief investment officer at UBS Group AG, said in a note to clients. But for Britain,“political uncertainty is likely to more than offset any benefit from a marginally weaker pound,” he said.

The FTSE 100 Index jumped 0.8 percent. The Stoxx Europe 600 Index swung before trading little changed. Futures on the S&P 500 rose 0.1 percent. The underlying gauge advanced less than one point on Thursday, for a second day of gains.

In other overnight news, there was muted reaction to China inflation report as producer prices missed expectations, and eased further; PBOC reverse repos close to maturities; overnight Hibor falls for sixth day; Shanghai Composite closed modestly higher.

Overnight, Wall Street had also seemingly judged that the testimony of former FBI director James Comey was not life-threatening for the administration of President Donald Trump. Comey accused Trump of firing him to try to undermine the investigation into possible collusion by his campaign team with Russia’s alleged efforts to influence the 2016 election.

“I think the market is taking less of an alarmist review of this situation because there is no smoking gun here,” said Jefferies & Co money market economist Thomas Simons. “So it’s not particularly impactful for thinking about … Trump’s economic agenda to go through.”

In commodity markets, spot gold was 0.3% lower at $1,274.20 an ounce. Oil prices remained subdued, wit Brent having settled at its lowest since Nov. 29, the eve of an OPEC production cut deal.

Bulletin Headline Summary from RanSquawk

  • UK PM May’s Conservative Party failed to win a majority in the UK general election although are still the largest party in government
  • The Northern Irish DUP are expected to support the Conservatives in a “confidence and supply” arrangement, not a formal coalition
  • Theresa May is now scheduled to head to Buckingham Palace to request to form a government

Market Snapshot

  • S&P 500 futures up 0.2% to 2,434.25 
  • STOXX Europe 600 down 0.1% to 388.76
  • MXAP down 0.03% to 155.14
  • MXAPJ unchanged at 505.75
  • Nikkei up 0.5% to 20,013.26
  • Topix up 0.08% to 1,591.66
  • Hang Seng Index down 0.1% to 26,030.29
  • Shanghai Composite up 0.3% to 3,158.40
  • Sensex down 0.06% to 31,193.17
  • Australia S&P/ASX 200 up 0.02% to 5,677.80
  • Kospi up 0.8% to 2,381.69
  • German 10Y yield unchanged at 0.257%
  • Euro down 0.3% to 1.1178 per US$
  • Brent Futures down 0.4% to $47.69/bbl
  • Italian 10Y yield fell 12.1 bps to 1.884%
  • Spanish 10Y yield fell 2.8 bps to 1.448%
  • Brent Futures down 0.3% to $47.70/bbl
  • Gold spot down 0.3% to $1,274.34
  • U.S. Dollar Index up 0.5% to 97.43

Top Overnight News

  • May’s Future in Doubt After Brexit Election Gamble Backfires
  • Hard Brexit in Doubt as U.K. Voters Reject May’s Strategy
  • Deutsche Bank Says Can’t Share Information on Trump Relationship
  • Comey, Trump Accuse Each Other of Lying in Wake of Hearing
  • China’s Power Capital Said to Pursue Bid for Welltower Portfolio
  • Engie, Orix Said to Mull Bids in $4b Equis Renewable Sale
  • Bank Stocks May Move as House Passes Dodd-Frank Rollback Bill
  • Saudis Have a Lot to Lose in Qatar Fight, Even If They Win
  • Calatlantic Group Secondary Offering Prices at $34.25 Apiece
  • Endo Reviewing FDA Request to Pull Opana ER From Market
  • HNI Cuts Outlook Because of Slow Office Furniture Sales

Asian equities have been somewhat unreactive to this hurdle for PM May and the uncertainty now surrounding the UK political front, with Asian bourses as well as US equity futures relatively mixed. Nikkei 225 (+0.7%) has been the outperformer thus far following the softness in the JPY, which had been looking to test yesterday’s high around 110.40. Shanghai Comp (+0.2%). and Hang Seng (-0.1 %) struggled to find any firm direction, while the marginal gains in the ASX 200 (+0.2%) were led by the rise in miners. Finally, 10yr JGB traded marginally higher as yields trickled lower throughout the session, with JGB’s also supported by the BoJ’s rinban operation.

  • Chinese CPI (May) Y/Y 1.5% vs. Exp. 1.5% (Prey. 1.2%).
  • Chinese PPI (May) Y/Y 5.5% vs. Exp. 5.6% (Prey. 6.4%)

Top Asian News

  • China’s Factory Inflation Eases as Raw Material Prices Decline
  • Philippines Suspends Resorts World Manila’s Casino Permit: BTVPh
  • Great Wall Motor Gains as Strong Pre-Orders Seen for New Model
  • Li Ka-Shing’s Firms Slump as Falling Pound Hurts Profit Outlook
  • Hong Kong Stocks Retreat From 2015 High Amid Overheating Signs
  • Dalian Iron Ore Caps Third Weekly Drop on Steel Market Outlook
  • SoftBank Boosts Japan Stocks, Beating Impact of ‘Super Thursday’
  • Little Impact Seen From U.K. Vote, ECB Meet, Comey: Asian NDFs

In European trading, the weaker GBP has benefitted UK equities with the FTSE 100 opening higher by over 1% before paring some of the gains amid the political uncertainty over what comes next. Utility companies led the way higher with SSE and Centrica both near the top of the FTSE, while large multinationals were helped by the depreciation in the GBP. Unsurprisingly, banking names such as Lloyds and RBS, declined while homebuilders also fell as the increased uncertainty could ultimately slow house purchases. Defensive sectors drove gains in other European equity markets with health care stocks performing well across the region. Gilts opened lower but recovered as UK equity markets reversed some of the gains. The UK data had little impact on UK asset classes despite industrial output rising less than expected in April, after declining for the previous three months.

Top European News

  • Young Seek Revenge on Old as Divided Britain Upends its Politics
  • Airbus Warns U.K. Government: Retain Labor Mobility to Save Jobs
  • U.K. Heads for Hung Parliament as May’s Election Gamble Fails
  • U.K. Industrial Output, Manufacturing Rise Less Than Forecast
  • DUP Said to Consider Arrangement to Ensure May Has Support: Sky
  • M&G Bond Manager Says Election Could Lead to Second Brexit Vote

In currencies, the initial reaction was seen in the GBP after the exit poll released on Thursday evening, which showed the Conservatives would fall short of a majority. GBP/USD then dropped to its lowest level in 7 weeks as reports emerged that Theresa May would not resign, although some profit taking saw GBP/USD bounce a little off its lowest levels. Other FX markets have been relatively unreactive with JPY weakness observed amid USD/JPY demand at the Tokyo fix. Today sees large options (2.1 bIn) expire at today’s 1000am NY cut. The pound weakened 1.7 percent to $1.2732 at 10:58 a.m. in London.

The yen retreated 0.3 percent to 110.35 per dollar.  The euro slipped 0.3 percent to $1.1181. The Bloomberg Dollar Spot Index added 0.4 percent, gaining for a third day.

In commodities, WTI and Brent crude futures both stabilised after the large declines seen in the early part of the week and since the OPEC meeting in early June. The market has largely shrugged off the geopolitical tensions in the Middle-East with Qatar and other Gulf countries. West Texas oil gained 0.5 percent to $45.89 a barrel, after two days of losses. Crude has slumped this week as an unexpected increase in U.S. crude stockpiles cast doubt on OPEC’s ability to rebalance world crude markets.  Gold fell 0.3 percent to $1,274.18 an ounce, declining a third day.

Looking at the day ahead, while the fallout from the UK election will no doubt be front and centre, there is also a little bit of data to get through. This morning in Europe we get more hard data points with more industrial production prints due in France and the UK along with trade data out of Germany and also the UK. In the US we are due to receive the wholesale trade report. The EU/NATO Conference is also due today. It’s worth also noting that this Sunday France begins the two-step process to elect a new National Assembly with polls due to close on Sunday evening. The second round is on June 18th.

US Event Calendar

  • 10am: Wholesale Inventories MoM, est. -0.3%, prior -0.3%
  • 10am: Wholesale Trade Sales MoM, est. 0.2%, prior 0.0%

* * *

DB’s Jim Reid concludes the overnight wrap

You’ll wake up to shock and chaos this morning here in the UK. In numbers terms this election result is a bigger surprise than Brexit or Trump if not quite on the same scale in terms of wider global market implications.

I say wake up as if you’re like me you haven’t been to bed yet so forgive my rambling. With 516 out of 650 seats declared at 4.25am the BBC/ITV forecasts are that the ruling Conservative party will fall a handful of seats short of an overall majority. They may be able to form a working majority with the help of the Northern Irish Unionist Parties (who may win around 10 seats) but if so this would still be a very weak government and PM Theresa May might be vulnerable given she staked her reputation on holding this very early election when her party had a 10-20% lead in the polls. Another election is possible at any time really. How this leaves the Brexit negotiations is a complete mystery. The range of eventual outcomes are now much wider on this front. Hard line Brexit Tories will hold more power in a weak Tory administration of some form but the possibility of fresh elections relatively soon and an alternative more soft line approach is also a possibility. Given we’re on a tight Brexit timetable this is not great news for the UK. The Europeans must be watching with some amusement. Overall it’s going to be constitutional chaos in the UK for the foreseeable future. Ironically the Conservative Party look set to win around 44% of the vote and increase their share – an impressive number in the context of recent decades. However as we discussed yesterday the return to a two party state hasn’t allowed them to run away with things.

In markets Sterling immediately tumbled -1.96% as soon as the exit poll hit the screens, touching a low of $1.2709. It’s recovered a little but is still down -1.62% versus yesterday’s close. The moves have mostly been contained in the currency. FTSE 100 futures are -0.20% while S&P 500 futures are actually up slightly. Safe havens like Gold (-0.60%) and the Yen (-0.26%) are weaker and Treasuries are flat. Bourses in Asia are generally flat to up +0.90% too.

Whatever the overall results of this election some of the stats about potential age demographics of the voters is very interesting. Sky did a poll on election day and found amongst 18-34 year olds Labour were on 63% and Conservatives 27%. With 35-54 year olds both were on 43% and over 55 year olds Labour on 23% and Conservatives on 59%. Labour made a huge push for the young who don’t normally vote in high numbers and the Conservative Party actually proposed policies that worked against their natural older vote perhaps thinking their early lead in the polls gave them an opportunity to try to balance the books more. So were the young more motivated than normal and were the elderly less motivated? It’s fascinating as this shows the dilemma a lot of politicians have around the world. We generally have a wealth divide where the older generation (who normally vote) have a high proportion of it relative to the young who are generally in debt and/or in many countries unemployed. It feels this divide is at the higher end of the historical range.

Are the young starting to rebel more and are looking for hope? Can you politically afford to attack the wealthier older voter to help redistribution? One of the big themes of our long-term study last year was that we thought we were at the end of a 35 year super cycle of policy, politics and with it interest rates and asset prices. Our argument was that the Trump and Brexit vote marked the turning point when the disenfranchised were starting to actually win elections/ referendums. If policy wasn’t increasingly calibrated to these ‘forgotten’ people then the incumbents would get voted out. What we felt was that this would mean more fiscal spending, bigger deficits and less reliance on monetary policy at least until fixed income markets rebelled and then you’d probably get central banks forced to monetise that debt. This was our slow roadmap for the future and nights like last night may be another inching towards that. As Mr Trump has discovered it’s not easy to increase spending though but I think the trend will be up in the years to come.

There’s no doubt that this will dominate the rest of Friday for markets but investors have also got the ECB to mull over following an overall fairly dovish outcome from yesterday’s policy meeting. The most significant part of the statement and as largely expected was the removal of the “or lower” rates guidance and also upgrading economic growth forecasts by 0.1pp. Mario Draghi also said that risks to the growth outlook are now “broadly balanced” which represented an upgrade to neutral. However, the inflation tone was distinctly dovish. Draghi described the outlook for core inflation for the rest of the year as “low and flat” which as our European economists aptly put is “insufficient”. Core inflation forecasts for 2018 and 2019 were revised lower by 0.1pp to 1.4% and 1.7%. Our colleagues note that these numbers are still consistent with a gradual exit but the ECB can afford to take it slowly. Our team highlight another two important points from the meeting. The first is that there was not a single hint of the ECB preparing the ground for tapering or a phasing out of QE and the second is that the Council is cautious about wage inflation. As a result, our economists have now pushed back their timing of exit. They had expected a taper pre-announcement decision in September and one-off depo hike in December. However they now expect a six-month extension of QE to be announced in December at a slower pace of €40bn. QE will likely continue in H2 2018 at a slower pace still and a oneoff depo rate hike cannot be excluded in mid-2018 if further concessions need to be made to the hawks. In summary the start of the policy rate tightening cycle is more likely to be mid-2019 than end 2018. You can find more in our economists’ report here.

Markets reacted swiftly to the ECB with the Euro edging lower initially before consolidating into the close to finish -0.38%, although it is down another -0.27% this morning and below $1.120. Benchmark Bund  (-1.3bps) and OAT (-4.8bps) yields were both lower although it was the periphery which stood out with yields down 5bps to 13bps although as you’ll see shortly for reasons as much linked to Italian politics. 10y Treasury yields were actually a little higher (+1.6bps to 2.189%) while the S&P 500, despite getting a decent boost from Banks, limped to a +0.03% close. The James Comey testimony ended up being mostly a nonevent with both sides trading blows and accusing each other of lying, but as we had seen on Wednesday there was no silver bullet to really get markets excited about. It’s worth noting that late last night the House Republicans passed a bill to dismantle parts of the Dodd-Frank Act following a 233-to-186 majority. The Bill passes to the Senate now however it’s not expected to have much chance of passing in its current form.

Staying with markets, as noted above the standout mover in European bond markets yesterday was BTPs. 10y yields fell 12.8bps to 2.154% and the most since March 2016. This followed lawmakers in the  ruling Democratic Party saying that the push to reform the country’s electoral law was “dead” which in turn lowered the probability of a snap election as early as this autumn. This followed the far right anti-establishment 5SM rejecting the proposal in a parliament debate yesterday. The FT suggested that the PD and 5SM could still go back to the drawing board in the coming days however so it might not be the last we hear of it. Led by Banks, the FTSE MIB also rallied to the tune of +1.46% yesterday which was in the context of the Stoxx 600 (-0.01%) closing more or less flat.

Back to Asia this morning where inflation reports have also been released in China. Headline CPI for May has nudged up three-tenths to +1.5% yoy, matching market expectations, however PPI slipped a little more than expected to +5.5% yoy (vs. +5.6% expected) from +6.4% in April. That makes it three straight monthly declines in the annual PPI reading although as a reminder that does follow 14 straight months of acceleration.

With regards to the remaining data yesterday, in the US the sole release was the latest weekly initial jobless claims print which came in at 245k and which has left the four-week moving average at a still low 242k. In Europe the main focus was on the final Q1 GDP revision for the Euro area which was revised up onetenth to +0.6% qoq after expectations were for no change. That also saw the annual rate notched up two-tenths to +1.9% yoy and the highest since Q4 2015. Away from that Germany reported a better than expected +0.8% mom uplift in industrial production in April (vs. +0.5% expected). That has lifted annual growth to +2.9% yoy from +2.2%.

Looking at the day ahead, while the fallout from the UK election will no doubt be front and centre, there is also a little bit of data to get through. This morning in Europe we get more hard data points with more industrial production prints due in France and the UK along with trade data out of Germany and also the UK. In the US we are due to receive the wholesale trade report. The EU/NATO Conference is also due today. It’s worth also noting that this Sunday France begins the two-step process to elect a new National Assembly with polls due to close on Sunday evening. The second round is on June 18th.


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