20 April 2017

Of Politics and Markets

The news that we are to go to the polls on June 8th caught everyone by surprise, but markets barely registered the fact.

Shares had got off to an uncertain start on the short week after Easter, reflecting falls in Asian markets. Given the rhetoric coming out of both Washington and Pyongyang, it is hardly surprising that investors should be somewhat nervous.

It seems that political and geo-political influences are likely to dominate sentiment for the foreseeable future. While the pound took a brief initial knock on the announcement of a General Election, Prime Minister May’s words calmed the situation, with sterling swiftly recovering. Indeed,, the rally continued, bringing the pound to a five month high swiftly, but both our currency and the stock market are now likely to reflect expectations of the June result.

In the meantime, shares and the pound are travelling in different directions. This should come as little surprise. The FTSE 100 Share Index is dominated by companies with strong overseas earnings, so a weaker pound means higher profits in sterling terms. Also, the dominance of resource stocks – mining and oil companies – means that when commodity prices suffer, so does the index. With both oil and iron ore trending lower, resource stocks have fallen out of favour.

Don’t forget, too, that we have the French Presidential elections imminently. The disenchantment voters feel for the political establishment is being felt there too, if the polls are anything to go by. Worries that Marine le Pen could, against all the odds, secure the presidency has placed the euro under pressure as such a result would make Brexit look almost a non event.

Political news will, of course, pale into insignificance if tension continues to rise in the Far East. Outcomes are hard to call, given the unpredictability of the two leaders at the centre of this potential crisis. Successive US Presidents have examined the available options and shied away from direct action, but President Trump has already demonstrated that he will employ force if he considers it necessary – and North Korea is further down the road towards becoming a fully-fledged nuclear power now. 
China holds the key to a peaceful solution. North Korea relies on China buying their coal to keep their economy afloat and there are signs that pressure is being exerted here. We must hope that the strong language being used by America is designed to push China into more positive action.

And the Turkish president’s narrow victory in the constitutional referendum brings both the political and geo-political strands into play. With so much uncertainty around, investors could be forgiven for sitting on their hands for the time being.

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