Pound and IAG in focus

In early trading on Tuesday it looks like the pound is fading after a decent recovery at the start of the week. The trigger to the decline was the latest Survation opinion poll that showed the Conservatives on 43% and Labour on 37%. This indicates another slight narrowing from last week, but what may worry investors is that the Conservatives haven’t been able to recover from the hefty drop in support over the last couple of weeks.

Tories still likely to win

It is worth noting that the Tories still hold a sizeable lead over Labour, and the change in their fortunes remains outside the margin of error, according to Survation who prepared the survey. Thus, unless they have another catastrophic week then Number 10 could be Theresa May’s for the taking in 9 days’ time. Although GBP/USD has fallen back to 1.28, a drop of 68 pips from Monday’s high, we believe that key support should hold at 1.2776 0- the low from last week, after all the Tories are still expected to win, even if these polls are giving the markets a scare.

Imagining a Labour victory

However, financial markets are a hasty beast, so if we see a further narrowing in the opinion polls this week then the markets may start to price in the prospect of a Labour victory. While Labour’s tax and spending plans are unlikely to win any friends in the financial sector, the party’s more sanguine stance towards striking a trade deal during the Brexit negotiations might find common ground with some City grandees. Thus, even if Labour continues to gain ground in the coming days, we don’t think this will lead to an outright collapse in sterling. We broadly think that a labour victory (however unlikely) would be more negative for the FTSE 100 compared with the pound.

IAG weighing on the FTSE 100

The FTSE 100 is expected to open lower today, with IAG, the parent company of British Airways, expected to suffer a sharp loss after the weekend’s catastrophic IT failure. IAG fell more than 2% on the Spanish market on Monday, but today will be the big test. Will the market be merciful since most flights are now taking off on time, or will it punish BA for an IT failure that didn’t involve Cyber hacking, and was blamed on a power surge, something no one is going to believe? Even if you give BA the benefit of the doubt it still looks bad, if their systems are not strong enough to withstand a power surge, then this sort of thing could happen again, which could add downward pressure to the IAG stock price. Before the weekend’s outage, IAG was trading close to its highest level since 2015 at 614. It will be hard to sustain life above 600 after this weekend’s events. Although cost cutting has been good for the share price in the last year, it will come back to bite IAG if it stops them from doing what they are supposed to do: fly passengers to their destinations. Thus, we could see an initial loss of approx. 3-5% today, if bargain hunters come in to buy IAG on the cheap, then it would be a sign that the sell off will be short and sweet, and this stock won’t suffer lasting damage from the IT failure.

It’s also worth noting that the dollar is making a recovery this morning, which is also adding to the downward pressure on the pound and the euro.