Conservative wobble in the polls could unnerve sterling

What a difference a week makes, this time last week Theresa May’s Conservatives were enjoying a 20-point lead over its nearest rivals Labour. Fast-forward seven days and the Conservative manifesto that was releases last Thursday, has gone down with voters like a lead balloon, and now pollster Yougov is saying that Theresa May only has a 9-point lead over Jeremy Corbyn.

What a difference a week makes, this time last week Theresa May’s Conservatives were enjoying a 20-point lead over its nearest rivals Labour. Fast-forward seven days and the Conservative manifesto that was releases last Thursday, has gone down with voters like a lead balloon, and now pollster Yougov is saying that Theresa May only has a 9-point lead over Jeremy Corbyn. 

UK election outcome not a certainty

While a 9-point lead could still give Theresa May a comfortable victory on 8th June, the fact her lead has been slashed in half in just a few days may reinforce to financial markets that her victory is not a certainty. With three weeks to go before the election, another bad PR week for PM May and her team and the Tories’ lead over Labour could fall further into the low single figures, which could encourage sterling selling ahead of this crucial vote. 

Why May matters for sterling traders

At the start of this week the pound’s reaction had been muted, we need to wait for the UK traders to get in to get a sense of their concern. However, at one point GBP/USD had dropped below the crucial 1.30 level. A weakening of the pound on the back of a poor showing in the polls for Theresa May would not be surprising, after the Prime Minister announced the election last month the pound has risen 500 points versus the USD. A landslide from May soothed pound traders as it removed the prospect of a rushed Brexit deal to fit in with an election that otherwise would have been due in 2020. It also meant that Theresa May would have been handed a stronger mandate that could have silenced some of the harshest Brexiteers in the UK backbenchers that could have made negotiations with Europe a little easier for the Prime Minister. If these scenarios fail to develop, then the pound’s march above 1.30 could be disrupted, at least in the short term. We would expect to see a further retreat on Monday, potentially back to the 1.2860 support level for GBP/USD, the low from last week.

Whether or not GBP/USD falls below this level and back towards 1.25 may depend on how well team May deals with this polling shock. Will they role back on some of the more controversial elements of their manifesto such as social care and pensions changes? If so, this could help her to regain the upper hand in the polls. Right now, sterling’s reaction to this election won’t be on the minutia of policy put forward by each candidate, but by May’s expected margin of victory. If this continues to narrow then the lead up to the election could be a challenging time for sterling. 

Why Trump may not be a barrier to further stock market gains 

Elsewhere, the futures markets point to a positive open in global stock markets at the start of the week. This comes after President Trump enjoyed a relatively scandal-free weekend, and his first overseas trip to Saudi Arabia was deemed a success. Even so, political problems in Washington could continue to bite, especially now that a White House official is being investigated about their links to Russia. We expect markets to remain sensitive to fresh news-flow regarding this investigation this week. 

However, canny traders may see any further sell-off in stocks as an opportunity. Caterpillar, the large machinery company, was the strongest performer on the Dow Jones on Friday, up more than 2%, erasing its Trump-related sell off earlier in the week. Caterpillar is close to its highest level in nearly 3 years. This strong performance by Caterpillar’s stock price tells a bigger story about earnings performance in the US markets. Caterpillar’s star is in the ascendency because of its solid earnings announcement for Q1 and its boost in revenues. This is a theme across global equity markets, where strong earnings growth and positive surprises have been noted across sectors and geographies. Caterpillar’s outperformance is noteworthy, since it is considered a cyclical stock, if cyclical stocks are outperforming on the growth front then this bodes well for US indices even if the Trump political scandal continues to roll on.

 

Even though US economic growth disappointed in the first quarter, the strong performance in global earnings, US earnings-per-share saw growth of 16.5% in the first quarter beating estimates, suggests that the hard economic data could play catch up later this year. Thus, the stock market rally may not be over yet.

 

Can the Fed help the beleaguered dollar?

 

This week all eyes will be on the Fed meeting minutes, and any hint that rates may rise in June. Even a whiff of a hike could be enough to help the troubled dollar to recover. The dollar, unfairly in our view, took the biggest hit from the Trump scandal, falling in line with Treasury yields. However, the 10-year yield found good support at 2.20%, so if it can capitalise on that this week and move back towards 2.30%, then the dollar could be in with a chance of recovery. Interestingly, the dollar index closed the week just above the 61.8% Fib retracement of the June low to Jan high, if it can stay above this level then it could act as a springboard to a recovery in the buck in the coming days.

 

Opec and the oil price

 

Elsewhere this week all eyes will be on Eurozone PMIs on Wednesday and the Opec meeting on Thursday, when the oil cartel is expected to extend its production cuts in an attempt to erode the global oil glut and boost prices. So far their plan is working, Brent crude rose more than $3 last week on leaked plans for this week’s meeting. Anticipation of a bigger than expected cut to production could see oil drift towards $55 as we lead up to Thursday. It is worth noting, that any disappointment could trigger a sell-off in the oil price and other major commodities, which could weigh on the FTSE 100 due to the predominance of its energy sector.

 

Overall, we expect sterling to be the focus at the start of this week, as the latest polls suggest the UK election race could be tighter than first thought. As we progress through the week, the Trump trade, Opec meeting, Fed minutes, events in Brazil and Eurozone PMIs could all impact financial markets. 

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