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Market round up 12 June 2017

Jack Turner, Research Analyst

This week we cover the UK general election result and what that means for the next government, news impacting the financial markets coming out of the UK, Eurozone and US, as well as a portfolio update.

CAN THE CONSERVATIVES CLING ON?

Key - 12 June 17

The trend of the last weeks’ polls that saw Labour’s share of the vote increase exponentially continued though 8 June, delivering the shock result of a hung parliament. And May’s decision to call an election she did not need to could still cost her the role of Prime Minister. For now, the Conservatives and Northern Irish DUP are in talks over a ‘confidence and supply’ deal. Here, the DUP would vote with the Tories on key structural votes such as the Queen’s Speech and finance measures to give them a majority. However, infighting in the Tory party could mean that the Queen’s Speech vote does not pass, in which case the baton passes to Corbyn to try to form a coalition.


NEWS
POLICAL UNCERTAINTY IMPACTS BUSINESSES

The snap election result lead to a dramatic drop in business confidence according to the Institute of Directors (IoD). While there was also no desire for a follow-up election, business leaders believe that the political uncertainty could cause them major headaches, particularly given the lack of direction for Brexit negotiations and the absence of clarity on the status of EU workers employed in Britain. Other surveys echoed the IoD results, as well as flagging the fact that UK businesses may face higher wage bills through lower migration and increases in the minimum wage due to political pressure.

EUROZONE ECONOMIC GROWTH STEADIES
The European Central Bank (ECB) has increased its economic forecasts for the region for 2017 to 1.9%, up from the 1.8% predicted in March. The ECB also increased its growth projection for 2018 to 1.8% from 1.7%, and for 2019 to 1.7% from 1.6%. In further news, the ECB kept interest rates on hold as it downgraded its inflation target for 2017 to 1.5% from 1.7%. It also changed its expectations for 2018 and 2019: 1.6% was revised down to 1.3% and 1.7% was revised down to 1.6% respectively.

DODD-FRANK RULES UNDER FIRE
US banking regulations introduced after the 2008 Financial Crisis are being increasingly criticised by Republicans and may see an overhaul to support growth and reduce the federal budget deficit by an estimated US$24bn. On 8 June, the House of Representatives approved a bill that if passed by the Senate would scrap federal bailout powers, ease lending restrictions on banks and weaken the Consumer Financial Protection Bureau. However the bill received no support from House Democrats who argue that requiring shareholders to have a bigger stake in a company to propose changes, and abolishing the rule that financial advisers have to act in the best interests of their clients, are not wise choices.


PORTFOLIO ACTIONS
7IM’s investment team were on call during the election, staying up in the office all night should portfolio changes have been required.
Ahead of the vote, Bloomberg published a consensus of opinions on the potential outcomes –one of which included the view that the value of the Pound to the US Dollar would fall to $1.235 in the case of a hung parliament. However, while the Pound did slide in value on the night of 8/9 June, it was not by as much as had been initially feared. This may be because the market appreciates that a Tory government typically means a higher level for Sterling than a Labour Government often does. The lack of a majority means that May’s hard Brexit strategy may be derailed and that instead negotiations pave the way to a soft Brexit with Britain remaining in the Single Market.


THREE ANNOUNCEMENTS DUE THIS WEEK
14 June – US Interest Rate Decisions // 15 June – UK Interest Rate Decisions // 16 June – Eurozone Inflation Rate

^ LibDem* SNP ** Rest of field
SOURCES: BBC, BLOOMBERG, 7IM

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