Murky politics block potential growth

​​​​​Today's news headlines:

  • ‘Tories embrace no-deal Brexit’. EU election results have pushed the main political parties away from a compromise on a Brexit resolution. Tory candidates have started to adopt a more hard-line approach to get on and leave the EU, while Jeremy Corbyn has begrudgingly committed to giving the public a vote on any Brexit deal. (The Times)
  • ‘Pro-EU parties hold ground across continent in European elections’. The Greens and Liberals gained as traditional centrist parties lost ground. Right-wing Eurosceptics also made gains in France and Italy leading to a more divided, overall pro-EU bloc. (Financial Times)
  • ‘Global cost of the China-U.S. trade war could hit $600 Billion’. 2021 will be the peak year of impact if the current trade war escalates to cover all US-China trade. Frosty relations between the two nations need to thaw before Presidents Trump and Xi meet at the G-20 Summit next month. (Bloomberg)

Lining up with the polls

Over the long weekend, we learned the outcome of the EU elections, which was precisely as anticipated. Almost across the board, traditional centrist parties have lost ground to populist or Liberal/Green positions. The UK is no exception to this pattern; Nigel Farage’s Brexit Party won by a considerable margin, garnering 31.7% of the vote, which shows the support for his unconditional Brexit agenda. Although the result nearly mirrors the advance polling data, it seems surprising that Nigel Farage has garnered this much political clout. While the UK fundamental backdrop continues to improve at a slow steady rate, the politics continue to become murkier, blocking potential domestic growth and progress. 

Bottom line: The trade-weighted Pound Index has fallen for nearly three consecutive weeks in the lead-up to the European elections. Now that the outcome is as expected, we seem to be seeing Pound consolidation suggesting a bottoming of prices.

Reversal in risk aversion

As US and UK trading open again today, we are witnessing a rebound in risk appetite. Last week, US-China tensions escalated with further tariff threats, and disappointing data from the US dented investor confidence which resulted in equity sell-offs across regions, a notable decline in oil prices as global growth concerns increased, and a continued Sterling sell-off as UK political instability grew. Despite no progress on the trade story over the weekend, equities and oil prices have rebounded suggesting a bottoming of last week’s sell-off. Perhaps this signals that last week’s dire global growth predictions may have been somewhat overcooked. If anything, we are seeing Brent Crude rebound above 70USD per barrel as demand concerns ebb. Today’s US Consumer Confidence data is expected to show some improvement, which may provide further support risk.

Bottom line: Markets signal a reversal in risk aversion as equities and oil prices bounce back. Sterling’s record-breaking decline in May shows signs of coming to an end.

GBP/USD

The Pound fell over 0.5% against the US Dollar yesterday, despite bank holidays in both the US and the UK. The Pound Index is currently on track for its worst month since October 2016; however, the recent consolidation suggests we might have seen a bottoming out for the pair.

EUR/USD

Risk-off sentiment resulting from the US-China trade tensions has caused the Euro to fall 4.0% against the US Dollar since the beginning of the year. The safe-haven appeal of the Dollar could push the pair lower in today’s trading session following Trump’s comments that the US is not ready to finalise a trade deal with China.

GBP/EUR

Political uncertainty has risen following the strong showing for Nigel Farage’s Brexit party in the EU elections. The Sterling Index fell during yesterday’s trading session in a continuation of this months’ theme of Pound weakness. With very little data out this week, the Pound’s consolidation is unlikely to be determined by fundamental factors.