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Daily Briefing: May hopes for payday with election gamble
June 8, 2017 / 7:31 AM / in 4 months

Daily Briefing: May hopes for payday with election gamble

Britain's Prime Minister and leader of the Conservative Party Theresa May attends an election campaign rally in Solihull, June 8, 2017. REUTERS/Ben Stansall/Pool

LONDON (Reuters) - Possibly the two most intriguing unknowns in the UK election as voters head to the polls today are how successful Theresa May will be in scooping up UKIP voters in former Labour Party bastions, and how many young voters will actually turn out to vote for Jeremy Corbyn.

Those two variables could determine the size of what financial markets are now banking on as a May victory.

Sterling is firmer on overnight polling indications that she could get a substantially increased parliament majority: the logic is that this would strengthen her domestically and so give her greater leeway to secure a closer relationship with the EU in forthcoming Brexit negotiations. A first exit poll is due out as soon as voting ends around 2100 GMT, with the bulk of results due between 0200-0400 GMT on Friday morning.

Today will likely mark a further small step in the European Central Bank's path back to policy normality as it gears up to unwind its unprecedented stimulus programme from next year. Blink and you'll miss it, however: it will mainly be visible in language acknowledging an improved economic outlook and slightly upgraded growth forecasts.

The fact that core inflation remains below its target and the presence of lingering political risks (i.e. mainly an uncertain Italian election) will, however, strengthen the case for it doing very little else: expectations are set for it to keep rates on hold and refrain from giving any further cues on plans to ramp its bond purchases down.

MARKETS AT 0655 GMT

Much has been made of the ‘Triple Threat Thursday’ for markets watching the UK election, European Central Bank meeting and Senate testimony from former FBI chief Comey. But beyond the commentary on the outside risks from these events, it’s hard to see any real trepidation in market prices.

Jeremy Corbyn, leader of Britain's opposition Labour Party, speaks at his closing election campaign rally in London, June 7, 2017. REUTERS/Clodagh Kilcoyne

Comey’s written testimony ahead of today’s grilling says U.S. President Trump asked him to drop an investigation of former national security adviser Michael Flynn as part of a probe into Russia's alleged meddling in the 2016 presidential election. Although this alone keeps pressure on Trump, Wall St markets largely shrugged it off as it takes the speculation around impeachment no further before the public hearing and there are doubts both about whether there enough in this investigation to impeach, as well as whether that would be unambiguously bad for U.S. investments longer term.

The S&P500 closed up a fraction late Wednesday, with the ViX implied volatility index hovering just above 10 percent. The dollar barely budged against the main world currencies overnight.

Slideshow (3 Images)

Similar arguments are being made about the UK election. For all the scenarios of a hung-parliament or Labour-led coalition, the central assumption in the market is for a slightly increased majority for the ruling Conservatives and averaging the very diverse opinion poll projections points to the same. That’s largely why spot sterling has been so firm in recent days, although the jump in overnight implied volatility readings to about 30 percent – its highest since last July – at least shows some pricing of possible risks over the next 24 hours.

As for the ECB, all the soundings on downgraded inflation forecasts and background trepidation about banking sector stability make it highly unlikely it will signal any major tightening of policy ahead.

And, so the biggest moves of the week so far remain centred around ebbing energy prices and inflation outlooks in general. Brent crude has stabilised after another steep drop briefly below $48 overnight and is now down more than 7 percent year on year. With inventories showing no easing of the global glut, the row between Qatar and its Arab neighbours is seen as undermining the OPEC consensus about production cuts to limit oil supply.

Financially, the isolation of Qatar is taking its toll on the country’s debt and currency markets. Standard & Poor's downgraded Qatar's debt on Wednesday as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country because of Doha's diplomatic rift with other Arab states.

Ten-year U.S. Treasury yields have steadied just under 2.18 percent after this week's steep decline, however. Asia stock markets were steady overnight and European equities are expected to rise about 0.2 percent at the open.

Editing by Andrew Heavens

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