June 7, 2017 / 7:28 AM / 6 months ago

Daily Briefing: UK election - final push

LONDON (Reuters) - British Prime Minister Theresa May will spend much of the last day campaigning on a tour of marginal Labour-held constituencies while her main rival Jeremy Corbyn will start in Glasgow and gradually wind his way back down south for a final rally in his north London home base of Islington.

Britain's Prime Minister Theresa May delivers a speech during an election campaign visit to Langton Rugby Club in Stoke-on-Trent, June 6, 2017. REUTERS/Ben Stansall/Pool

Despite consistent evidence of a narrowing in May's once mighty poll lead, it is worth bearing in mind the strong consensus among polling companies that May will end up winner, with the main point of contention being by how much.

The YouGov model suggesting she could lose her majority contrasts sharply with an assessment released last night based on the so-called Ashcroft model that she would extend her majority to a solid 64 seats.

Such an outcome would probably be cheered by both financial markets and wary Brussels officials anxious to get on with the job of making Brexit as smooth and clean as possible: the logic goes that she would then be strong enough at home to make concessions in Brexit negotiations, thus facilitating a deal and avoiding any "cliff-edge" scenario.

Today’s announcement in Brussels of an increased funding for joint EU defence research is a reminder in the meantime that the rest of Europe is keen to press on with other matters.

Defence, long a weak link in EU integration not least because of UK foot-dragging, has been earmarked as one area where the 27 remaining members can make progress. This announcement will focus on a push to develop military hardware in its earliest stages of development.

German industrial orders dropped a way-more-than-expected 2.1 percent in April, a rare wobble in the otherwise solid narrative of a strong and growing German economy. The main culprit however seems to be a fall in the number of large-scale contracts - by definition a volatile component of the mix - so this may yet emerge as a one-off.


Britain's opposition Labour Party leader, Jeremy Corbyn, speaks at a rally ahead of the forthcoming general election, in Glasgow, Britain June 7, 2017. REUTERS/Russell Cheyne

The modest drift to "safe haven"  trades this week has centred on the heavy newsflow expected on Thursday and some trepidation, if not a little confusion, about events in the Middle East.

The UK election, a key Senate Testimony from former FBI chief Comey and the European Central Bank meeting all coincide tomorrow and will reverberate into Friday.

U.S. Treasuries and top-grade sovereign bonds have been bid while gold, Japan’s yen and the Swiss franc have all benefited too. Major equity indices have dialled back from record highs and oil prices have been on the backfoot.

But the mostly small moves have hardly constituted a panic, or even a “dash”. Some of the dollar and Treasury moves have been due to underwhelming U.S. economic numbers and ebbing inflation forecasts and longer-term Fed rate rise expectations. Volatility measures remains historically very low and even though positive economic surprises for the G10 group of leading economies have ebbed, data releases on average are now matching consensus expectations across the board.

What’s more, the risks from Thursday’s events are not all that clear cut.

Financial markets are by and large assuming PM May will return with a slightly increased majority and can also see some macroeconomic and Brexit-related positives from a change of government too.

Not least given the waning global inflation pressures and background stress in some parts of the euro zone banking system, the ECB is highly unlikely to signal any major change of its super loose monetary policy beyond nodding to the improving economy and reduced need to ease again. The unexpectedly large drop in German industrial orders in April seen this morning will hardly encourage them to talk tough.

On the other hand, the relatively smooth resolution this morning of Spain’s failing Banco Popular, sold to Santander with little or no contagion or anxiety surrounding the situation over the past week, is some testament how sentiment and confidence in euro zone institutional supports has improved over the past five or six years.

German bund futures are lower first thing and there’s been little or no move in Spanish sovereign debt spreads. Euro/dollar is flat near recent highs. Wall St’s slight retreat late Tuesday was not mirrored across Asia overnight, with Shanghai stocks outperforming with gains of more than 1 percent and Tokyo flat. European stocks are expected to tick lower.

Editing by Jeremy Gaunt

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