UK markets on course for mixed week

Summary:

• GBP little changed on the week

• FTSE gains but lags peers

• Gold set for largest drop in 3 years

On the whole it’s been a fairly mixed week for UK assets with the pound little changed and while the FTE has moved up to its highest level in 5 weeks it is struggling to gain traction above the 7400 handle. The start of the election campaigns have been even more eventful than usual and the intense level of coverage suggests that the forthcoming ballot will be one of the most closely followed in many years. Even though it seems to be a simple two horse-race between Boris Johnson and Jeremy Corbyn to become the next PM, their prospects of success will likely boil down to how successful the former is at framing this as an election mainly on Brexit while the latter will want to draw the focus away from this and onto other domestic policies.

GBP has had a pretty mixed week, losing 1% to the USD but making small gains of 0.1% against both EUR and JPY. Source: xStation 

The market reaction last month to a perceived increase in the prospects of Boris’s deal passing suggests there is still further upside for the pound if a deal can be struck, but it is the alternative choice presented by both potential leaders that creates a wide divergence of possible outcomes and creates plenty of uncertainty. Should the Brexit party take a significant number of seats then the Conservatives would be reliant on their support to pass any Brexit-related legislation and therefore there’s a good chance that a no-deal scenario would once more come back to the table. Alternatively, Labour’s policy of putting their best Brexit deal against remain in another referendum would bring back the prospect of the most positive outcome for sterling. 

While Labour’s deal would likely resemble Boris’s in several key aspects it would probably amount to a softer version of Brexit and therefore be more pound positive. However, this isn’t where the biggest divergence lies and its the other outcome that presents the biggest potential shock, whether that would be a no-deal or remain. This is the crux of the matter as far as financial markets are concerned and while a no-deal under Boris Johnson or a remain outcome under Jeremy Corbyn are the least likely of each leaders two options to transpire, they are still perfectly plausible scenarios and represent the potential for the wildest swings in the markets.

Even though the FTSE has rallied this week it still lags behind many of its peers with the German Dax for instance enjoying a far stronger push higher. Source: xStation 

Gold set for biggest weekly drop in 3 years 

While the FTSE is on course to post a weekly gain, the rise in the benchmark has been outdone by the rally seen in European equities in recent sessions and the US where all 3 major indices have chalked up all-time highs. The move in stocks has hogged the limelight and received the lion’s share of attention but arguably the more noteworthy action has occurred in the fixed income space with significant increases seen in yields. 

The chief reason for these gains has been more optimism on the US-Sino trade front and with this coming shortly after a pick-up in key economic data and a growing belief that the Fed will now at least bide their time before delivering further cuts, should they decide further stimulus is necessary. Taken together, these factors provide a pretty potent cocktail for higher yields and these increases can be felt keenly in the precious metals complex with Gold on track for its largest weekly drop since the 2016 US election.   

Gold has fallen sharply this week with the market down by almost $50 from last week’s closing level. Source: xStation