The Agenda: UK polls, ECB - will they wont they, and Apple falls flat

Another day, another poll. Late last night another Survation poll has put the Conservatives a mere 1.1 point ahead of Labour, well within the margin of error, with just two days of campaigning to go. We have pointed out that there are multiple polls, and not all are as negative on the Tories as Survation appears to be. However, it was enough to knock GBP/USD back from its highs on Monday at 1.2940, even though the pound remains remarkably stable as we lead up to the UK election.

Another day, another poll. Late last night another Survation poll has put the Conservatives a mere 1.1 point ahead of Labour, well within the margin of error, with just two days of campaigning to go. We have pointed out that there are multiple polls, and not all are as negative on the Tories as Survation appears to be. However, it was enough to knock GBP/USD back from its highs on Monday at 1.2940, even though the pound remains remarkably stable as we lead up to the UK election. 

Why traders aren’t betting on a hung parliament

The options market is a better gauge of investor sentiment leading up to this election. 1-week risk reversals, which measure the amount of downside protection investors’ are buying, are at their highest level since before the EU referendum last year. However, 1-month risk reversals suggest that investors were buying more GBP/USD and GBP/JPY downside protection in October last year, when Theresa May threatened a hard Brexit. This suggests to us that sophisticated GBP traders are not worried about the prospect of a Hung parliament and drawn out negotiations to form a coalition government. Thus the market is looking for a one-party government from this election, although which party it will be is still up for grabs if you believe some of the opinion polls.

The impact of Labour on UK asset prices  

We have been impressed with the resilience of UK asset prices in the lead up to this election. It is worth remembering that betting odds still put the chances of a Conservative majority at 92%, so the prospect of an adverse outcome remains a key risk for asset prices in the short term. We wrote earlier about the prospect of a Labour victory on some UK asset prices, get our take here: https://goo.gl/gwMuBd

Why the ECB could be the saviour of European banks

The ECB meeting on Thursday is also coming into focus. Changes at this meeting could be modest, we don’t expect any announcement of an early taper of the APP programme, instead we could see a shift in the language in the opening statement around the balance of risks to the economy, and also to the ECB’s forward guidance. We think that the ECB could drop a reference to the potential for further cuts to the deposit rate. If this happens, then we think it would encourage a further steepening of the German yield curve (as benchmark for the Eurozone), and could boost European banking shares. The banking sector of the Eurostoxx index has been declining since early May, and fell further on Monday. We could see a turnaround in this index if the ECB does make the changes we expect, so European banks are worth watching this week.

Apple’s temporary dip does not threaten stocks, yet

US indices backed away from Friday’s record highs at the start of the week, and, surprisingly, Apple was the weakest stock on the Dow on Monday. Apple’s announcement of two new products including the Homepod speaker, which is significantly more expensive than its rivals, failed to impress investors. Although there was only a limited amount of enthusiasm for an Apple sell off, and the share price was down less than 1% on the day.

 

As Apple struggled, Google (Alphabet), rose to its highest ever level and jumped above $1000 per share. This suggests that demand for the FANGS hasn’t been dented, even if Apple’s latest product announcement has failed to grip investors’ imaginations.

 

Overall, we continue to think that the rally in risky assets may continue. A sign that risk appetite is still alive and well in the markets is the continued strength in Bitcoin, which remains close to the record high recorded last month. Other lead indicators, including the Dow Jones Transport Index and the Russell 2000, are also looking strong, thus, in the short term, we may continue to see gains for global stock markets even in the face of UK political risk, central bank policy uncertainty and a spate of terror attacks in London. 

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