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Market Comment 19th April 2017

FTSE down, GBP up as UK prepares for GE

FTSE down, GBP up as UK prepares for GE

UK Prime Minister Theresa May called for a snap General Election on June 8th. The election call was a pure surprise for both the MPs and the markets. The Parliament will vote today; 2/3 majority is needed to approve the election and May is not expected to encounter resistance.
 
Theresa May's victory is seen as done and dusted even before the vote is approved by the Parliament.

Of course, there could be a surprise on both sides. In one hand, many citizens are displeased with the Brexit and find Theresa May’s approach quite sharp vis-à-vis this painful divorce. On the other hand, there is no other candidate who could potentially set Theresa May off the game.

The most likely alternative candidate, Jeremy Corbyn, isn’t considered sufficiently strong to walk the country through the Brexit. In this sense, Theresa May could be pointed as a strong leader, who could negotiate a solid deal in Brussels.
The last thing the UK needs is additional political certainty as the country has already a foot outside the EU. It comes without saying that if Tories are defeated, the UK would only run around like a chicken without a head.

In the dirt of choice, and only five weeks before the election, we do not see an evolution that could compromise Theresa May’s position in the government. She is expected to win with a larger majority and come out with a bigger mandate.
So far, investors welcomed the snap election and bought the sterling on expectations that the GE would give Theresa May a mandate for a ‘softer’ Brexit by helping her to encounter the hardest ‘Brexiteers’.
 
From a technical perspective, given that Tuesday’s rally sent the GBPUSD to the overbought market (RSI 72%), we could expect correction and consolidation before a renewed attempt to the 1.30 mark. The support to the positive trend is eyed at 1.2717 (minor 23.6% retracement on March – April rise), before 1.2600 (major 38.2% retrace).
 
The FTSE 100 opened downbeat, after recording the biggest one day slump since the Brexit referendum on Tuesday. The key mid-term support to the post-Brexit/Trump rally is eyed at 7038p (minor 23.6% retracement since June 23rd 2016). The MACD index (Moving Average Converge Divergence) turned negative for the first time since December.
 
A pound recovery above the 1.30 mark against the US dollar and the euro pullback below the 0.80 level should further dent the appetite in the FTSE, which has benefited from the cheap pound since many months.
 
USD softened as 10-year yields plunged below 1.17%

The Federal Reserve’s (Fed) George said that there could be a ‘tradeoff between shrinking the portfolio and hiking rates’, bringing us back to the idea that the Fed could slightly step on the brake for rate normalization, to avoid a sharp tightening in the US monetary conditions, especially given that the US Secretary of Treasury Mnuchin warned that Donald Trump’s ‘phenomenal’ fiscal plans could be ‘unrealistic’.
 
The US dollar retreated against all of its G10 counterparts in Asia. The US 10-year yields tanked below 1.17%, the lowest levels since the US presidential election.
 
The probability of a June Fed rate hike plunged to 43.7%.
 
The Dow Jones is called 20 points softer at $20503 at the US open.
  
Gold holds the ground at $1278
 
Gold rebounded from $1278.87 on Tuesday and consolidated gains between $1283 and $1291. Trend and momentum indicators remain comfortably positive for a further recovery to $1300 and $1315 (minor 76.4% retracement on July – December 2016 decline). Dip-buyers are touted at $1278 (major 61.8% retrace) and $1272 (minor 23.6% retracement on March – April rise).
 
Euro to be handed to top sellers

The aggressive USD sell-off sent the EURUSD above the 1.0700. The pair rallied on stops before topping pre-1.0740. Traders remain seller on rallies as position trimming is expected moving into the first round of the French election due on April 23rd. There is mixed option expiries at 1.0700 that could enhance the price volatility near this level.
 
Yen up, Aussie down on risk-off

Limited risk appetite kept the USDJPY under pressure, despite softening US yields. The USDJPY traded below 108.70 in Tokyo. Put options are waiting to be exercised at 108.20/108.00 today. Breaking the 108.00-support could pave the way toward 106.33 (minor 76.4% retracement on post-Trump rally) before the 105.00 mark.
 
Nikkei (+0.07%) and Topix (-0.01%) traded flat in Tokyo, outperforming their Chinese and Australian peers.
 
The Aussie remained offered as iron ore futures traded at the cheapest levels since November, bringing up worries on whether the Trump’s reflation rally is over. Even the softer US yields couldn’t revive the carry traders’ appetite. The AUDUSD extended weakness past 0.7506, there is room for a further slide toward 0.7454 (50% level on the reflation rise). Option barriers trail below 0.7575 at today’s expiry.


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Market Comment 19th April 2017

FTSE down, GBP up as UK prepares for GE

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