Election throws U.K. into turmoil
Theresa May said seven times that she would not call a snap election. It appears that her eventual acceptance of her advisors suggestion, for whatever reason, has been the biggest political miscalculation in living memory.
The Conservative Party has given away its majority and it is now likely that this Parliament could have a very short life indeed.
She has already defiantly said she won’t stand down but it is not her colleagues that “have the knives out” it is the country.
Sterling reacted to the exit poll released as polling closed predicting very close to what indeed happened. It fell by 2% against the dollar before recovering a little.
Brexit negotiations have been thrown into chaos. A hung Parliament was probably the worst possible conclusion. As negotiations start, there will be no guarantee that the same team will end as begun. Brussels has stayed studiously away from any comment but would have been hoping for a settled negotiating team that isn’t referring back every five minutes.
Mrs. May, provided she survives, will have her hands tied over “no deal is better than a bad deal”. The definition of a bad deal has changed out of all recognition.
ECB voices inflation concern, leaves rates unchanged
The ECB meeting yesterday although overshadowed painted a clearer picture of economic activity in the Eurozone. The Asset Purchase Scheme and interest rates were left unchanged although the bias was shifted from negative to neutral.
Mario Draghi, the ECB President, voiced his concerns about benign inflation that still demands stimulus from monetary policy. He stated that inflation could remain below trend for years to come.
There is no model to predict monetary policy in the Eurozone as every move is a new addition to the experiment. How do you define interest rate policy for nineteen separate economies? With caution and difficulty!
The single currency rose against a weaker pound but the 1.3000 level is still proving tough to crack. A deeper correction, shaking out the weak longs may be necessary. If rates are hiked in the U.S. next week that may be just the catalyst that is required.
It will be interesting for the Eur/Usd as the interest rate differential widens but the two economies grow at a similar rate.
Comey fires blanks
In the end there was no smoking gun although from a perception perspective, Donald Trump will be viewed as more than naive, as he is being painted.
James Comey in his testimony to the Senate Intelligence Committee voiced his opinion that he was fired from his job as FBI Director to affect, in some way, the investigation into “Russiagate”. He stopped short of accusing the President of trying to influence a Federal investigation preferring to “leave that decision to others”.
Trump will be relieved privately although his public persona won’t show any concern. The major effect of Comey’s testimony is that the FOMC can now be reasonably certain that Trumps fiscal stimulus package will pass.
The need for a rate hike at next week’s FOMC meeting is still, from an outside view, nowhere near certain. Interest rate differentials will drive the dollar forward as the spectre of the financial crisis finally abates. Usd/Jpy is be a useful indicator of risk appetite and if the market feels a hike, if it happens as justified then “risk-on” trades will be fashioable again.