Weekly Market Update: Sterling rallies on UK general election result

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Market Update

Sterling rallied last week after the Conservative Party won 365 seats in the UK general election, securing a majority of over 80. The Pound was up +1.5% vs the US Dollar and +0.9% vs the Euro, with the result being that although global stocks were up in local terms, UK investors generally experienced negative returns. US and European equities were down -0.7% and -0.3% respectively, however Emerging Market equities were up +2.2%, partly driven by optimism as a tentative trade deal between the US and China has been agreed in principle. UK equities rallied +1.6%, with Utility stocks, previously a Labour nationalisation target, seeing strong gains. Globally, Materials and IT were the best performing sectors. UK 10Y yields were up 1.9bps, closing the period at 0.791%, however, US 10Y yields were down -1.4bps, closing the week at 1.823%. In US Dollar terms gold fell -0.3% while the oil price was flat over the week.

CIO Analysis

In last week’s election, the British public decisively broke the Brexit deadlock, removing the spectre of a disorderly hard Brexit in the near term as the one-year transition period is set to begin at the end of January, allowing time for supply chains to adjust to the changes. As far as investors are concerned, the worst case scenario is now an “orderly hard Brexit” (which the BoE has calculated could cost as much as 5%-7% of GDP) as opposed to a “disorderly” one. Consequently, the Pound jumped, up almost 12% from its June lows, while the FTSE 250, mostly mid-cap stocks, reached its highest level ever. For short-term GBP traders this is great news. However, long term investors need to heed Winston Churchill’s famous words after Dunkirk: “We must be very careful, not assign to this deliverance the attributes of a victory”. The fact that the worst-case scenario has (almost) disappeared does not mean victory has been achieved. In other news, central banks will remain dovish for the time being. After a tentative trade deal between the US and China last week, investors are left wondering whether in the upcoming elections China will still be in the President’s crosshairs, and the deal just a tweet away from dissolution, or will Mr. Trump’s next target be Europe.

David Baker, CIO

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