The Market Today
U.K. Election Results in Hung Parliament, PM May Scrambles to Form Coalition Government
by Craig Dismuke, Dudley Carter
Today’s Calendar – Watching the Market Response from U.K. Election: Today’s only scheduled release is the April final revision to wholesale inventories, an important indicator for inventory accumulation in the eventual GDP report. Inventories were initially projected to have declined 0.3% MoM leading to a small revision lower for 2Q GDP estimates. With a light calendar, the markets are likely to respond today primarily to the evolving outlook for Brexit – a process likely to be tempered somewhat by yesterday’s election results.
PM May’s Early Election Plan Backfires: As predicted by early election polls released at the close of Thursday’s U.S. trading session, the final tallies from yesterday’s U.K. election resulted in just the fifth hung parliament in British parliament’s history; a situation in which no single party has a majority. PM May called for yesterday’s elections back mid-April in hopes of leveraging recent popularity and adding to the existing 330-seat Conservative working majority. Instead, the vote went the other direction and the Conservative’s presence fell below the 326 seats needed for a majority. The results elicited calls from top leaders across the political spectrum for May to resign. Instead, PM May has scrambled to form a coalition government – when two parties agree to partner and forge a majority – with the Democratic Unionist Party in a bid to keep the Conservatives in power. While her political hand has been weakened, a coalition government would allow her party the majority support needed for passing legislation in the lower house. However, the DUPs favor a softer Brexit than the Conservatives and their newfound “kingmaker” status will likely allow them to push in that direction. With Brexit negotiations scheduled to begin in just over a week (June 19), a parliamentary majority (keeping the DUPs on-board) will be key to avoid adding additional turmoil into what are already expected to be tumultuous negotiations between the U.K. and EU. In the longer run, this should be a positive for the Pound which could help keep the Dollar in-check.
Overnight Activity – Fallout from Unexpected U.K. Election Results Contained to Local Markets: The overnight news cycle was almost exclusively focused on the unexpected election results in the U.K. that showed PM May and the Conservatives lost their majority in the lower house. While the results yield another element of uncertainty into the U.K.’s future, any negative market impact has been contained within U.K. asset markets. The Pound sank more than 2% overnight but has pared those losses to less than 1.5% early this morning. The weaker currency helped the U.K.’s FTSE 100 gain 0.5% and U.K. gilt yields are lower by 1 to 2 bps. Elsewhere, Asian markets closed mostly higher and the Stoxx Europe 600 is hovering around unchanged. Treasury yields rose despite lower yields in Europe. The 2-year Treasury yield rose 1.6 bps to 1.33%, the 5-year yield 1.8 bps higher at 1.77%, and the 10-year yield up 1.6 bps to 2.20%. The Dollar strengthened as the Pound slid and the Euro and Yen both softened. U.S. equity futures are modestly higher.
Yesterday’s Trading Activity – Comey’s Testimony Creates Intraday Volatility, Early U.K. Exit Poll Send Pound Plunging Late: U.S. stocks only inched higher Thursday except for the Nasdaq which gained a solid 0.4% and set a new all-time record high. But those gains didn’t occur in the absence of a bit of volatility. After climbing almost exclusively for the duration of former FBI Director Comey’s testimony, stocks sold off in early afternoon. The move back towards breakeven occurred in the last hour of trading. Treasury yields were similarly volatile but held above Wednesday’s levels for the entirety of Thursday’s trading. Yields peaked just as Comey’s testimony started but drifted lower into the close. After breaking above 2.21%, the 10-year yield settled up 1.6 bps at 2.19%. The 2-year yield rose 0.8 bps to 1.31%. Currency shifts were the late, breaking news as early exit polls tracking the U.K. election indicated a hung parliament. The news sent the Pound plunging 1.7% as such an outcome could not only create uncertainty for Brexit negotiations, but uncertainty surrounding the future of PM May’s government itself.
House Passes Unwind of Dodd-Frank Rules Opening Door to More Moderate Senate Action Next Year: The House passed on a party-line vote the CHOICE Act yesterday repealing a host of Dodd-Frank regulations. The measure is expected to die a quick death in the Senate but is expected to open negotiations on the repeal/replacement of certain Dodd-Frank regulations over the course of the next year. Separately, Treasury is working on changes to rules and interpretations of some Dodd-Frank regulations and is expected to release the first set of those changes next week.