UK Local Elections: Stay Bullish on GBP
Noise around the UK local council elections highlights the fact that in today’s lightning-fast media cycle not every election matters equally. Pundits are trying to make the case that a wide victory by PM Theresa May’s Conservative Party suggests a sweeping victory in the General Election on June 8. But we suspect that this latest vote is more focused on local issues and less about Brexit. Making an extrapolation to broader voter sentiment is difficult, especially given a low turnout.
Yet in the short-term, why not trade in the sentiment. A solid showing by the Conservatives should equal a chance of a significant majority in the national vote next month. Should May receive such an electoral mandate, this should empower the UK’s position heading into UK-EU Brexit negotiations. We would fade the hype and continue to believe the current harsh rhetoric (£100bn divorce bill) does not represent the probable end result.
UK fundamentals remain solid as composite PMI data suggests strong 2Q growth momentum (April rose to 56.2 from 54.8 above 54.5 expected) but we recognise that PMI did over predict 1Q growth performance. Predictions of a seizing up in consumption behavior by households and/or businesses have not occurred. Finally, devaluation of GBP continues to deliver dividends for exporters and manufacturing. We therefore remain bullish on GBP especially against the EU and JPY.
Crude oil hits 5-month low
After free falling to $43.76 during the Asian session, June West Texas Intermediate crude future contracts consolidated slightly below $45 a barrel, down 1.40% since Thursday close. The oil rout speeded up this week as cloud continued to gather on the horizon. Investors started to question the future of OPEC’s output deal, while US inventories remain elevated (527.8mio barrels, excluding strategic reserve, as of April 28th). The market is currently looking for further weakness in crude oil prices and will almost surely find some. We actually see two main reasons for a lower oil. First, the OPEC strategy, which was aiming at squeezing out the US shale industry, was huge failure as US producers were able to lower their breakeven price and continue to pump. Secondly, the market is still positioned on the bullish side as net non-commercial positioning, reported by the CFTC, stands at around 19% of total open interest. This cannot be viewed as extreme positioning but it nevertheless indicates that the risk is biased to the downside.
The $42 support (low from mid-November last year) is the key level to monitor as break of the latter will accelerate the sell-off. In the short-term, we expect crude prices to stabilise but we remain positioned for further weakness.
French Elections: Almost a done deal!
While there was (small) uncertainties before the second round, the debate turned towards the advantage of Emmanuel Macron which remained very calm and detailed his program. Marine Le Pen was very expected to detail her economic plan as its feasibility is often questioned, and she failed to inspire confidence on that). The polls are still showing a strong Macron victory and after the debate, we don’t really see how Marine Le Pen could win. The likelihood of a victory of the National Front candidate is very slight and the glass ceiling won’t be broken.
The euro currency should not move much amid the French election. It is going to be the time to think about the third round the parliamentary election and there’s one risk there. Under the “En Marche” banner will certainly be a lot of socialists for whom French people are now reluctant to vote. We remain suspicious that Macron will get a majority at the parliament.
We remain bullish on the single currency at least in the medium-term. A small relief rally may intervene on Monday. Attention will now shift back towards the ECB for the June Meeting.
