PS: Here’s our news story about today’s market reaction to the snap election:
Closing summary
London traders are catching their breaths after the most volatile day for some months. So here’s a closing summary.
The British pound has soared to its highest levels of the year after Theresa May stunned Westminster, and the City, by calling for a general election on June 8th. Sterling has gained two cents against the US dollar, and is also up against the euro tonight.
The strength of sterling helped to wipe more than £45bn off the value of companies on the FTSE 100. The blue-chip index closed down 180 points, due to the strong pound hitting the value of overseas earnings, plus a fall in commodity prices.
Some analysts have predicted that a large Tory win would make a ‘hard Brexit’ more likely. Others have argued that it would allow May to resist pressure from hard-line eurosceptic MPs, and cut a more moderate deal with Europe.
City firms have been racing to revise their forecasts. Deutsche Bank was forced to rip up its bets against the pound, and promised to release new forecasts soon.
Deutsche Bank, one of the biggest sterling bears in recent years, says it’s changing its view. 2017 election a “game-changer” on Brexit pic.twitter.com/IlYvqYhUlq
— Ed Conway (@EdConwaySky) April 18, 2017
There are also concerns that the election could hurt the UK economy, if it deters firms from committing to fresh investment.
But in brighter news, the International Monetary Fund has revised up its forecast for UK growth this year - from 1.5% to a punchy 2%.
That’s all for tonight. Our Politics Live blog is tracking all the latest developments this evening. GW
UBS: May will dampen calls for 'hardest Brexit'
Swiss bank UBS has just fired over a research note on the snap general election.
They predict that the pound will rally against the US dollar over the next year, to around $1.36, and that shares will also rally over the next six months.
Here’s the key points:
- The election is likely to have a limited economic impact
- We continue to expect the pound to close some of its valuation discount to other major currencies in the months ahead
- Our sense is that May will use this election as an opportunity to dampen the influence of those in the Conservative party who favour the hardest form of Brexit (a World Trade Organization-type arrangement)
- May’s presumptive plan, if it proceeds as she intended, could support the economic outlook. It is unlikely to suffice to ward off the headwinds that falling real incomes and sliding business confidence will have on growth in the short term, yet it does reinforce our view that the economy will stage a recovery in the medium term
- We still target GBPUSD at $1.36 in the next 12 months
- We see a recovery in the 10-year gilt yield to 1.50% over the next 12 months
- We retain our six-month FTSE 100 forecast of 7550
Pound at four-month high as City welcomes snap general election
After a highly volatile day, the pound is sitting proudly at its highest level since last December.
Sterling is currently up two cents against the US dollar at $1.276, and up one euro cent at €1.191. They’re both the highest levels in four months.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says the currency markets have “roared their approval” for a snap UK election.
That has a predictable impact on the FTSE 100 - which earns around 70% of its revenues from overseas, rather than in sterling.
Khalaf explains:
The fall in the stock market is not a negative response to the UK election per se, rather it is a knock on effect of a surging pound, combined with price falls in some key commodity markets, all of which has taken its toll on the heavyweights of the FTSE 100 index.
As we’ve covered earlier, many economists have predicted that the poll on June 8 will strengthen Theresa May’s hand in her EU negotiations. The risk of a ‘cliff-edge’ crisis, in which MPs reject the final Brexit deal, is perceived to have fallen.
Some experts are arguing that May could rein in hard-line eurosceptic MPs, if she get a robust majority.
David Owen of stockbrokers Jefferies explains:
With the Labour party in disarray and polling (in a poll of polls) around 15 points behind the Conservatives, and the Lib Dems still facing an uphill struggle to win a lot more seats, the 8th June will likely see Theresa May elected with a larger majority.
This will not just put her in a much stronger positon when negotiating with Brussels, but also should mean that the influence of some of her own hard-Brexit backbenchers may be significantly diluted.
Biggest 1-day fall in #FTSE100 since #Brexit vote (-2.4%) as GBP strength weighs on UK large cap stocks reliant on revenue outside of UK
— Joshua Raymond (@Josh_RaymondUK) April 18, 2017
By my reckoning, today’s slump has wiped off around £46bn from the combined value of the 100 companies in the FTSE 100 index.
Footsie suffers biggest fall since Brexit vote
Ouch! Britain’s FTSE 100 index has suffered its biggest one-day fall since the aftermath of the EU referendum last June.
The blue-chip index has ended the day down 180 points, or 2.46%, at 7147 points.
That takes the FTSE 100 down to its lowest level since February 2nd, and means it’s barely registered any gains in 2017.
Mining companies suffered the biggest losses, with BHP Billiton, Glencore and Anglo American all down over 5%.
Like other internationally-focused firms, their overseas earnings are worth less in sterling terms when the pound rallies. Miners also suffered from the fall in the price of Chinese iron ore - a potential sign of slowing demand.
Joshua Mahoney of IG explains:
Incredibly, on a day where the UK stocks are suffering so heavily, it is not the announcement of a general election which has caused the biggest losers, but instead the falling price of iron ore, which has dragged the likes of BHP Billiton, Anglo American and Glencore to the bottom of the pile.
Media Eghbal, Head of Countries’ Analysis at Euromonitor International, is worried that the election will hurt the UK economy.
She says:
Weeks of campaigning leading up to the June election will add further uncertainty to an already highly ambiguous UK outlook. This will weigh on confidence and encourage investors to continue to hold off investment decisions until after the elections so it may well be now that we will start to see a slowing of economic growth.
Euromonitor forecasts that UK real GDP growth will slow from Q2 2017 onwards to reach 0.8% annually by Q4 2017 compared to 2.0% a year earlier.
With elections due in 2017 in Europe’s three largest economies of Germany, France and now the UK (contributing 43.1% of European GDP in 2016), volatility in Europe is only set to get worse.”
A general election means new manifesto promises from the UK’s political parties.
And that could mean that existing pledges on, say, pensions and national insurance rates are ditched.
Steven Cameron, Pensions Director at Aegon, says this include could the famous ‘triple-lock’ (which guarantees that pensions rise by average wages, inflation, or 2.5%, whichever is higher):
He writes:
“While Brexit related matters will clearly dominate June’s General Election, Political Party Manifestos could reopen other contentious issues including pensions, savings, taxation and the changing nature of employment. This could include the future of the state pension triple lock, which had looked safe until 2020, the shelved increases in self-employed National Insurance and the unfortunate ‘will they, wont they’ debate on pensions tax relief reform. Whilst revisiting these policy areas may not be a vote-winner amongst pensioners, higher rate tax payers, or the self-employed, the opportunity exists for all parties to set out their stall on these key issues, creating much needed longer term stability.
Cameron predicts that rising prices could even become an election issue:
“We may also see a new set of economic concerns rising in voters’ minds. For example, pensioners on fixed incomes are particularly affected by the ongoing uptick in inflation we’ve seen since the decision to leave the EU. Some older voters may start asking questions about each of the parties’ plans to ensure it doesn’t surge much beyond current levels.”
Financial journalist Paul Lewis also flags up the potential threat to the triple lock:
all those tax commitments now gone. Commitment to keep triple lock on state pension also now dead. Unless renewed in 2017 Manifesto
— Paul Lewis (@paullewismoney) April 18, 2017
With 30 minutes until the close of trading, the FTSE 100 is firmly on track for its worst day since last June.
The blue-chip index is down 2.3%, or 168 points, at 7159, as the surging pound eats into the value of multinational firms in London.
Sterling continues to get a boost from the general election decision - it’s now up two cents at $1.276, the highest level this year.
Chancellor welcomes sterling rally
Over in parliament, chancellor Philip Hammond has hailed the surge in the pound’s value today.
He told MPs that the government doesn’t have a view on the appropriate value of sterling -- that’s a matter for the markets.
But in the next breath, Hammond tells a Labour member that he’s surely “delighted” that the pound has risen today.
He says:
(The) prime minister’s statement this morning has sent sterling up in the markets, demonstrating the confidence that the markets have in a future, for this country, under a Tory government with a new mandate.”
A glance at historic opinion polls shows why the City expects Theresa May to romp home in June....
Theresa May will go into the #GeneralElection with the largest lead of any Conservative PM in modern history pic.twitter.com/LtfUh8MTno
— Press Association (@PA) April 18, 2017
Most City economists and investors seem convinced that Theresa May is going to win the general election by some distance (as do the bookmakers, to be fair).
Here’s Nancy Curtin, chief investment officer at Close Brothers Asset Management, explaining the market reaction:
“With Brexit negotiations on the cards, the Prime Minister has sought to strengthen her hand by calling a General Election. A successful election in June would likely provide May with a larger majority, one that would ease the process of agreeing terms of negotiation in Westminster.
As we have seen across the Atlantic, a divided party can cause delays in driving policy change – delays the Prime Minister simply does not have time for, so this move to consolidate her power is wise, especially as recent polls show the Conservatives leading by more than 20 points ahead of Labour. Much depends on the Conservative manifesto – but the election campaign is unlikely to upset the markets.
Unless we see a political upset, a greater source of clarity and confidence will be welcomed by investors as Brexit discussions get underway in earnest.”
IMF hikes UK growth forecasts
The International Monetary Fund has just got Theresa May’s election campaign off to a good start, by hiking their UK growth forecasts.
The IMF now expects Britain’s GDP to expand by 2% this year, up from 1.5% back in January and just 1.,1% last year, outperforming almost every other advanced economy.
The Fund has also raised its forecasts for global growth this year, from 3.4% to 3.5%, and attacked the protectionist policies championed by Donald Trump and Marine Le Pen.
Maurice Obstfeld, the IMF’s economic counsellor, says:
“The global economy seems to be gaining momentum – we could be at a turning point.
“But even as things look up, the post–world war two system of international economic relations is under severe strain despite the aggregate benefits it has delivered – and precisely because growth and the resulting economic adjustments have too often entailed unequal rewards and costs within countries.”
Here’s the full story:
Share prices in London are suffering further losses.
The FTSE 100 is now down 151 points, or 2%, at 7175, putting it firmly on track for its worst one-day performance since the Brexit vote.
As mentioned earlier, that’s mainly because the rallying pound hits the value of multinational companies listed in the City.
But....the smaller FTSE 250 index, which contains medium-sized UK focused firms, is also in the red. It’s lost 227 points, or 1.1%, taking it down to 19294 points.
Every sector of the FTSE 100 is in the red, with mining companies suffering the biggest losses.
Deutsche Bank has declared that the general election is a “game-changer” for the pound, forcing it to tear up its forecasts.
Deutsche had been one of the most bearish voices in the City about sterling. Last month, it predicted that the pound would fall further as Brexit negotiations began. Not any more....
Deutsche Bank, foremost among the sterling bears, are binning their forecasts: "We are closing out all our bearish FX trades"
— Mike Bird (@Birdyword) April 18, 2017
Deutsche Bank, one of world's biggest sterling bears, to raise sterling forecast in coming days, says UK election news a "game changer".
— Jamie McGeever (@ReutersJamie) April 18, 2017
Pound hits four-month high as traders predict Tory win
Breaking! The pound has now hit its highest level against the US dollar since last December.
Sterling has extended its gains, and is now up 1.6 cents at $1.2729 - a four month high.
Investors remain pretty confident that the election will deliver a decisive results, says Trevor Greetham, Head of Multi Asset at Royal London Asset Management:
“Sterling has taken the news of a snap general election positively, as while it means increased political uncertainty in the near term, it probably means less uncertainty in the longer term.
He’s also not worried that the general election campaign will eat into the two-year window to negotiate Brexit.
“If Theresa May gets a significantly increased mandate it will strengthen the UK’s position in Brexit negotiations. In any case, while the UK may be distracted for the next few weeks of political uncertainty, there probably isn’t much benefit in the UK engaging with French and German governments on Brexit ahead of their own elections.”
By calling a June election, Theresa May is effectively getting an extra two years to steer Britain through Brexit, as the next election needn’t come until 2022.
So argues Neil Williams, Chief Economist at Hermes Investment Management:
The PM’s call today to bring forward the election to 8 June looks both a way of consolidating her political position and tacit recognition that completing onerous Brexit negotiations will take longer than the two years hoped for by triggering Article 50.
Holding the election this June instead of by May 2020 effectively offers her an extra two years to strike a deal before having to go to the nation again.
But even this may not be long enough to address all the issues, he adds:
I fear our negotiations could take many years to potentially end up back close to square one in terms of striking Mrs May’s preferred “bold and ambitious free trade agreement”. This suggests she will negotiate to maintain access to - but no longer full membership of - a tariff-free system (akin to Canada’s deal), and/or a customs union (similar to Turkey’s).
Even this will need time. First, the deal when struck will need Parliamentary approval, and then be subject to a ‘phasing in’ period (Mr Hammond has suggested two years) to allow firms, consumers and officials to adjust to the new arrangements. A second independence referendum in pro-EU Scotland, though not precluding Brexit, would also have provided an extra hurdle to completing it before the previous election deadline of May 2020.
Second, the UK is relying on a cooperative sign-off by its 27 EU peers. The only real precedent we have is Greenland’s exit in 1985. This was a ‘soft’ exit, but it took three years. We, larger and 44 years entwined in the EU, will need longer.
The pound is on the brink of hitting $1.27, up over one cent today.
Carlo Alberto De Casa, chief strategist at City firm ActivTrades, says the market is confident that Theresa Ma will win a larger majority on 8 June.
“Markets tend to like a stronger government – they are predicting one in the UK due to the apparent weaker situation Labour is in – and we have seen in Turkey what a similar situation can do for the currency.
Despite today’s rally, the pound is still worth 15% less against the US dollar than before the EU referendum:
The pound certainly up sharply today but worth putting it in context. Here’s £ vs $ over the past year pic.twitter.com/hb0SazmXtR
— Ed Conway (@EdConwaySky) April 18, 2017
Eurasia: Hard Brexit now more likely
The poll on June 8 will be a “Brexit referendum”, says Mujtaba Rahman of Eurasia Group, an analyst firm.
Rahman expects Theresa May will win a substantial majority, which will prevent pro-EU MPs from pushing for a ‘soft Brexit’ (eg, with membership of the single market).
Instead, the PM will have a mandate to get a deal, making a ‘hard Brexit’ much more likely, he argues:
Unity is the Tories’ secret weapon. Pro-EU Tory MPs will not defy May’s line during the election. They are therefore much less likely to fight for soft Brexit once she has won a mandate. The Lords, however, will still have a soft Brexit majority. Peers will still apply pressure to May but without backing in the Commons the unelected second chamber will be powerless to halt a hard Brexit.
An election will therefore strengthen May’s hand in the Brexit negotiations. The EU27 would arguably also have to treat her with more respect—not someone who, as Nicola Sturgeon recently reminded May, had never won an election as leader.
May wants an EU deal. The extra freedom that an election win would give her will also give her more room to make the concessions she has recently signalled—on the divorce bill; and freedom of movement and the ECJ’s remit during a transitional period. It will be much more difficult for hardline Brexiteer Tories to oppose these concessions if the PM has won a personal mandate.
A Conservative victory in the general election is almost a racing certainty, according to the bookies.
The odds on a Conservative outright majority are 1/5, said Ladbrokes, with Labour’s chance of winning the most seats put at just 7/1, with even longer odds, 12/1, for obtaining a majority.
That said, the same bookies were giving odds of 10/1 on an outright Conservative majority in the days before Cameron’s surprise victory in 2015.
Lib Dem hopes of a huge anti-Brexit surge in support are slim, judged by the odds. Boyle Sports reckons the party has just a 25/1 chance of winning the most seats in the House of Commons, with UKIP priced at 50/1 whilst the Green party are the 200/1 outsiders. But you can get 5/1 on their being no overall majority.
It’s now also a 1/5 shot Jeremy Corbyn is replaced as leader of the Labour party before the end of 2017. Meanwhile, Boyle Sports will give you 33/1 on Britain changing its mind on Brexit and rejoining the EU before the start of 2025.
Jessica Bridge of Ladbrokes said:
“May’s change of heart has caught everyone by surprise, but it’s looking hard to see Labour springing their own on June 8th with the Tories long odds-on for victory.”
The FTSE 100 is extending its losses, and now down 130 points or 1.7% at 7197.
That’s means we’re on track for the biggest one-day selloff since the Brexit vote, as the Telegraph’s Tara Cunningham tweets:
#FTSE100 heads for worst day since immediate aftermath of Brexit vote (June 27, when it fell 2.6%). It's currently off 1.6% #GeneralElection pic.twitter.com/sonlUr3ZL8
— Tara Cunningham (@TaraSCunningham) April 18, 2017
City experts are in broad agreement that Theresa May will win a larger majority on June 8th:
Here’s Dean Turner, an economist at UBS Wealth Management:
“We believe it is highly likely the Conservatives will increase their majority and firm up the future direction of government policy, particularly in regard to Brexit.”
Simon Derrick of Bank of New York Mellon agrees:
“I guess people see that this may give Theresa May a better majority. It is a politically astute move and it should provide more stability going over the immediate aftermath of the exit from the EU.”
The latest odds from online betting exchange Betfair suggest they’re right:
UK Next General Election – Most Seats
- Conservative 1.11 (1/9)
- Labour 12 (11/1)
- Lib Dems 50 (49/1)
- UKIP 200 (199/1)
- Any Other 300 (299/1)
Stephen Martin, director general of the Institute of Directors, hopes that the general election won’t JUST focus on Brexit.
Politicians need to offer solutions to other problems, such as the rise of robotics and the gig economy, he says:
“Businesses are having to get used to being buffeted by the changing winds of politics at the moment, and will just have to endure yet another campaign. This must be used as a chance to properly debate what leaving the EU means for the long-term future of the UK, including how we continue to bring in the skills employers need.
“While Brexit will inevitably dominate the campaign, there are also much wider questions that need to be addressed on the changing nature of business and work, automation and our ageing society. These can’t be ignored in the run up to June 8, and the business voice must be heard in this crucial discussion.”
The pound had rallied because Theresa May is likely to win a “significant majority”, says Peter Ashton, managing director of Eiger FX:
“There is still huge uncertainty surrounding the implementation of Brexit but a strong majority party will help to provide a degree of stability while we negotiate the choppy waters ahead.
Rob Aird, corporate partner at law firm Ashurst, says Theresa May’s decision shows just how big and complex Brexit will be.
He argues that the general election will have two principal effects:
Optimists will say that it gives the public a chance to have their say on who should run the country during the negotiation process and how that process should be run.
Cynics will argue that the Government has called this election as they sense an opportunity to increase their parliamentary majority, and extend their time in power, which will likely make agreeing and implementing Brexit (and any transitional arrangements) much easier to achieve domestically.
FTSE 100 tumbles over 100 points
Britain’s stock market is on track for its biggest one-day fall in three months, as the surge in the pound hits shares in London.
The FTSE 100, which is packed with Britain’s largest companies and many multinationals, has shed 116 points to 7210. Only four of the 97 companies in the Footsie are up today.
That’s partly because a stronger pound will push down the value of their overseas earnings.
Mining companies are leading the selloff. They were already down before May’s announcement, following a sharp fall in the price of Chinese iron ore.
Dr Adam Marshall, director general of the British Chambers of Commerce, is worried that a general election could be a damaging distraction.
“Many business communities will understandably be concerned that attention will inevitably shift from the economy and the intricacies of leaving the EU to a potential election campaign. Firms will want to be reassured that the key challenges facing the economy will be front and centre throughout any election period.”
Many City experts (like many MPs!) have been caught off-guard by today’s shock news.
Aberdeen Asset Management Investment Manager Luke Bartholomew says it will take a while for investors to calculate what it means for Britain’s exit from the European Union.
“No one was expecting this. Not least because the Government itself ruled an election before 2020 out barely four weeks ago. But Theresa May has clearly smelt an opportunity to consolidate her mandate ahead of the Brexit negotiations.
The market reaction has been muted so far. Sterling sold off initially and has now come back. But it will take investors some time to digest the effects of the election in the next few days. A big factor for them is whether the election will make a softer stance on the Brexit negotiations more likely. The election should hand Theresa May a much bigger mandate to stand up to the harder line, anti-EU backbenchers which currently hold a disproportionate sway over her party’s stance on Brexit. That would be welcomed by financial markets. There’s also a decent chance of some volatility now with imminent elections in both the UK and France.”
The pound has risen to a four-month high against a basket of international currencies.
Pound hits 10-week high as UK general election called
The pound has surged to its highest level since the start of February, following the dramatic news that Theresa May is calling for a general election on June 8th.
Sterling has ripped higher after the prime minister declared that Britain will head to the polls in a few weeks time.
With opposition parties backing the plan, the general election is nailed on. And City investors are welcoming the move -- with many predicting a large Conservative win.
That has sent the pound roaring up to $1.266, its highest level in 10 weeks, after an early wobble....
Our Politics Live blog is tracking the main news; I’ll pull together City reaction here....
...starting with Shilen Shah, Bond Strategist at Investec Wealth & Investment, who says:
“After much speculation this morning, the Prime Minister has confirmed that she is calling an early general election to fully implement the Brexit process.
“Following some initial weakness ahead of the statement, Sterling has stabilised and is slightly up on the day. Gilts yields have also been stable, with the 10-year yield hitting a session low of 1.01%.Overall, today’s announcement suggests that PM wants full control of the Brexit process without any interference from the opposition.”
It’s official! Theresa May has called for a general election, on 8 June.
Sterling has actually recovered its early losses, and is back to $1.257 against the US dollar.
Full coverage here:
Updated
FXTM Vice President of Market Research, Jameel Ahmad, sums up the mood in the City right now:
There has been some sudden selling in the British Pound over the past few minutes following the news that UK Prime Minister Theresa May will be making a statement within the next hour.
There are unconfirmed rumors at this stage circulating that Theresa May might be stepping down, while there are other reports going around that this could be linked to the announcement of a UK general election.
Truth be told, nobody is really that aware of what is going on but this uncertainty has caused a reaction in the Sterling.
Money is also pouring into UK government bonds, as nervous investors prepare to hear Theresa May’s statement.
That has driven the price of UK debt up, sending the yield (or interest rate) on 10-year bonds down to a six-month low.
*U.K. 10-YEAR YIELD DROPS BELOW 1%; FIRST TIME SINCE OCTOBER
— lemasabachthani (@lemasabachthani) April 18, 2017
Pound falls ahead of Theresa May statement
Back in the City, the pound has fallen sharply following the news that prime minister Theresa May will deliver an unexpected statement at 11.15am.
The Westminster rumour mill is in overdrive, with speculation of an early general election. And that’s pulled sterling back towards $1.25, having hit a three week high this morning.
No-one really knows what’s going on, which is another reason to sell the pound....
Current rumours on PM announcement:
— Joshua Raymond (@Josh_RaymondUK) April 18, 2017
1. Snap Election
2. PM to resign on health Grounds
3. No one has a clue#GBP
Our politics liveblogger Andrew Sparrow is on the case:
On the other hand, the euro could rally if French voters plump for a more mainstream candidate.
Kathleen Brooks of City Index predicts a ‘relief rally’ if Marine Le Pen is eliminated in the first round of voting, on Sunday.
She writes:
Since Marine Le Pen is the most euro-toxic of all of the candidates, one can assume that a first round eradication for her Front National Party could trigger a relief rally in the euro in a week from now. We mentioned in our previous note on the French election that Francois Fillon’s candidacy was worth a second look. He has a solid block of conservative voters, whose numbers may be swelled if it is a means of keeping Le Pen out of the Elysee Palace. Added to that, French voters are surprisingly immune to scandals, such as those that have plagued Fillon’s candidacy.
While the latest odds still give independent Emmanuel Macron a healthy chance of winning in May, his odds have fallen as those of Fillon and Far Left candidate Melenchon have surged. If we get a Macron/ Fillon second round run-off, this is likely to be considered “market friendly”, triggering a rally in the euro, the Cac, but also in the German Dax and Eurostoxx index, which have had decent correlations with the French bond yield this year.
Trader: French election could drive euro down to dollar parity
Jordan Hiscott, chief Trader at ayondo markets, believes the euro would suffer sharp losses if the French election delivers a surprise result.
The euro is flat against the dollar this morning, at $1.065 - but it would probably tumble to parity if either Marine Le Pen or Jean-Luc Melenchon defies the odds and wins the presidential race.
Hiscott says:
While at opposite ends of the spectrum politically, both are unhappy with the current terms of being in the Euro, with Le Pen after an outright referendum and Melenchon pushing for re-negotiation of the current terms, or an exit if this can’t be achieved. What can we determine from this? Two French politicians at opposite ends of the political spectrum, almost united in their mutual dislike, in its current form, of an institution they were the key founders of and have been the biggest supporters of for the past 30 years.
“If we extrapolate this to Europe’s financial assets, looking at EUR-USD in particular, the prognosis is not good. The dual effect of two anti-EU politicians could weigh heavily and while currently trading around 1.0625, it wouldn’t surprise me to see parity with the US dollar following a Le Pen or Melenchon victory. Amazingly enough, this wouldn’t be a level seen since the October 31 2002, and a lifetime away from the all-time high of 1.60 in 2008. Whatever the result from the French elections, its arguable, the fragmentation of Europe is in swing.”
France’s borrowing costs have inched up this morning, widening the gap with safe-haven German debt.
That’s a signal that investors are getting more worried about Sunday’s election.
Reuters has the details:
France’s 10-year bond yield rose 2.5 basis points in early Tuesday trade to 0.93 percent, while German Bund yields were marginally lower at 0.18 percent and within sight of Friday’s more than three-month low of 0.16 percent.
That left the gap between the two at 75 basis points and not far from six-week highs hit last week around 78 bps.
The spread between short-dated French and German bond yields was at 44 bps - also within sight of six-week highs.
Christine Lagarde has also claimed that Britain’s economy is starting to suffer from last year’s Brexit vote -- even though growth has been rather stronger than the IMF predicted.
QUESTION - You say the UK is still having growth, being still in the EU. Do you think that Brexit can be a bad trip for the UK?
MS. LAGARDE - As you know, we had anticipated a much lower growth than the UK has demonstrated during the last quarters. But we are beginning to see – in terms of disposable incomes, of depreciation of the currency, etc. – the beginning of the impact of Brexit. And the more discussion there is of companies or financial institutions relocating to Frankfurt, Dublin or Paris, the more uncertainty there will be in a country where the capital city plays such a role as a financial center.
The IMF will release its latest forecasts for the UK in under five hours time, as part of the World Economic Outlook. It has already revised up its 2017 growth forecast once this year, in January - from 1.1% to 1.5%......
Lagarde: Trump should tone down his 'bad guy' language
On America, Lagarde seems to acknowledge that criticism of Germany’s trade surplus are valid --- although she doesn’t approve of Donald Trump’s approach:
QUESTION - Is Trump right to criticize the German trade surplus? Are the bad guys saying the right things?
MS. LAGARDE - I would stay away of the “bad guy” language--that is a moral judgement that does not have a place in the kind of work we do.
When there are excessive imbalances, when there is excessive inequality, or instability in the financial system, all those three are bad for stability, for the sustainability of growth. We do not shy away from saying that.
Lagarde: Greece needs debt restructuring
During her interview with European reporters, Christine Lagarde also warned that the IMF is adamant that Greece needs debt relief - and it won’t join its bailout programme until this is tackled.
QUESTION - Without a debt restructure upfront, the IMF will not participate?
MS. LAGARDE - If the Greek debt is not sustainable in accordance with the IMF’s rules and on the basis of reasonable parameters, we will not participate in the program.
QUESTION - Is the staff of the IMF now convinced that the debt is not sustainable as it is?
MS. LAGARDE - Based on the debt sustainability analysis, we will determine how much debt needs to be restructured. But there is no question in our mind that a degree of debt restructuring is needed.
Updated
Here’s a summary of the latest French polling data:
Lagarde: French election weighs on 'confidence and stability' of euro area
Christine Lagarde, the head of the International Monetary Fund, has warned that the French presidential election is casting a “huge question mark” over the eurozone.
In an interview with several European journalists, just published, Lagarde says that France’s election race is causing rising uncertainty worldwide, and creating fresh uncertainty over the future of the currency bloc.
Here’s the key section:
Q: Is the fate of the euro also at stake in the French presidential elections?
MS. LAGARDE - It is clearly one of the debates. And one that actually weighs on the confidence and the stability of the euro area--because if one of the largest partners is wondering if its destiny and fate is in or out of the group, it is a huge question mark for the others.
Two of the candidates in this spring’s election have made no secret of their opposition to European institutions.
Marine Le Pen, the head of the National Front, has repeatedly blamed the single currency for hurting France’s economy - arguing that the country would prosper if it returned to the franc. Poll suggest that she could win the first round of voting, this Sunday.
Jean-Luc Mélenchon, the far-left candidate who is making a late surge in the polls, is also a critic of the European Union. He has vowed to renegotiate France’s relationship with the EU - and hold a referendum on exiting the Union if he fails.
Many political analysts argue that Le Pen would lose the second-round run-off to either Emmanuel Macron or Francois Fillon -- both of whom are less critical of the euro.
But, as Christine Lagarde puts it, there is clearly “rising concern” about the uncertain outcome of the elections.
She says:
There is no single country that I have visited in the last couple of months where I have not been asked with anxiety what the outcome might be.
It matters because of the role played by France, the size of the French economy relative to other euro area partners, and because some of the ideas being discussed seem aimed at disrupting the current architecture of the European Union as far as France is concerned.
The sooner that uncertainty is removed, and I guess it will have to wait until May 7th, the better it will be for the global economy, and of course, for the euro area economy.
I’ll truffle through the interviews for more significant points now...
Updated
The agenda: Geopolitical tensions loom over the markets
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
City traders have lots to ponder as they return to their desks following the Easter holidays break, with plenty of geopolitical risks swirling.
The French presidential election, last weekend’s controversial Turkish referendum, and rising tensions between America and North Korea could all move the markets this week.
With less than a week to go until the first round of voting, France’s election looks pretty tight. Far-left politician Jean-Luc Mélenchon is making a late charge, gaining ground on centrist Emmanuel Macron, right-winger Francois Fillon and National Front leader Marine Le Pen.
Interestingly, Fillon appears to be shaking off the allegations of wrongful payments to family members that rattled his campaign. Kit Juckes of French bank Société Générale explains:
The latest poll (from Opinionway) puts macron and Le pen at 22%, Fillon at 21% and Melenchon at 18%. So where last week it was Melenchon who was surging, now M Fillon is closing in.
Uncertainty reigns supreme and relative rates are going to struggle to drive the Euro higher against that backdrop.
All the main candidates are making a late push before Sunday’s polls; the top two will enter the crucial second-round runoff in early May.
Further afield, Pyongyang’s latest (failed) missile test is a particular concern to investors - especially as a senior North Korean official has warned that “thermonuclear war may break out at any moment”.
Naeem Aslam of Think Markets reckons investors are looking for Washington’s reaction (vice-president Mike Pence is in South Korea today).
North Korea faced another failure in its nuclear test and investors are wondering what will be the reaction from the US and its allies. The demand for other safe haven assets also picked up in the light of this, spot gold is moving further closer to our target of $1300.
We are sitting near a five month high. When it comes to the gold price, we do think that the momentum could easily continue and bias remain skewed for more upside move.
Chris Weston, chief market strategist at IG in Melbourne, says:
“It seems the focus is now firmly on future missile tests from North Korea and whether any future tests will actually be successful. One suspects the concerns in North Korea have further to play out.”
The Turkish lira, meanwhile, has rallied after Turkish president Recep Tayyip Erdoğan claimed a narrow, and contested, victory in a referendum to reshape Turkey’s constitution as a presidential republic.
The lira gained 2% against the US dollar yesterday as investors calculate that Erdoğan’s win means less political instability. It will certainly give him sweeping new powers; critics fear more authoritarianism and further crackdowns against the president’s opponents.
The legitimacy of the result is being questioned – as more than 1 million votes without official stamps were included. That hasn’t stopped Donald Trump giving Erdoğan a congratulations call, though.....
IG predicts that the London stock market will dip in early trading, but other European markets are expected to rise.
Our European opening calls:$FTSE 7313 -0.20%
— IGSquawk (@IGSquawk) April 18, 2017
$DAX 12134 +0.21%
$CAC 5086 +0.29%$IBEX 10363 +0.36%$MIB 19818 +0.23%
On the agenda today....
The International Monetary Fund will release its latest assessment of the global economy today, at 2pm BST (or 9am Washington time).
This is the IMF’s chance to upgrade, or downgrade, its growth forecasts - and also point to problems in the world economy. Last week, IMF chief Christine Lagarde hinted that global growth forecasts could be revised up, despite its concerns over the protectionist trade policies advocated by Donald Trump.
We’ll be tracking all the main events through the day....
Updated
