UK: Market reaction to early elections call - TDS
Analysts at TDS explain that the knee-jerk market response has seen GBP and gilt yields move higher, with the much larger and clearer move coming from currency markets, while gilt yields still remain fairly close to their 2017 lows, and tied to moves in US Treasuries.
Key Quotes
“The assumption is that the new election will lead to a much larger Conservative majority, which is generally considered to be a positive for UK markets. However, there are some nuances this time around with the upcoming Brexit process that mean that this rule of thumb may not apply quite the same way. This is because PM May and the Conservative party are in favour of a relatively hard Brexit approach, something that markets aren’t all too keen on. So a stronger mandate for PM May and for the Conservatives and their bias toward a clearer cut with the EU could help to keep a lid on GBP gains, even in the event of a landslide electoral win.”
“The call for a snap election in Britain has seen cable rally to fresh highs. The snap elections generate some short-term noise, but the consolidation of power in Britain could offer a clearer mandate in the Brexit negotiations. The constructive news has seen GBPUSD mark a new daily high, and trade through its 200-day MA (1.2624) for the first time since Brexit. After breaking through the February high of 1.2706, the next level on our radar would be the December high of 1.2775 followed by the fibo level from the September high near 1.2830. While we had forecast GBPUSD hitting 1.29 by the end of Q3, the surprise election announcement raises the risk that we see those higher levels sooner.”
“The USD side also looks supportive for further gains in cable, which reflects softer US data surprises, a longer timeline for fiscal reform and a shift in Fed pricing. Indeed, with the greenback tracking fairly close to rate spreads, it remains vulnerable to a deeper correction alongside a turn in US data surprises.”
“Given yesterday’s breaks through some key technical levels, GBP will be one to watch over the coming days and weeks, with the currency likely to start trading more closely with election polls, and the anticipated size of the Conservative majority. The immediate risk to watch will be the vote in the House of Commons tomorrow. Near-term ,the French election remains a key risk for EURGBP, and we continue to favour downside momentum there. Our high-frequency fair value model argues a significant discount for GBP and the model points to a break below 0.83. Market positioning also looks flat EUR and still maintains sizeable shorts in GBP, which increases the potential for a break lower in the cross on a squeeze.”
“A decent turnout for Le Pen in the first round this weekend (voting share > 30%) would be a near -term catalyst for further downside in EURGBP. At the same time, our positioning and valuation models point to further downside in AUD and NZD, which could favor more upside in GBP against the antipodeans. The break of some key technical levels in GBPAUD suggests momentum trades could start to accelerate the move higher with a break of 1.69 suggesting a test of 1.7250.”