Pound surges on UK election news
From the moment the exit poll was released, the narrative changed for this election, with an almost certain coalition soon turned into an unlikely majority for the Tories. The Scots had their voice heard, with almost every seat north of the border falling yellow. However, this revolution drove the UK to vote Tory in response to the possibility of an SNP-Labour coalition, which was associated with another referendum and eventual breakup of the UK as we know it.
While the idea of a UK breakup has been averted for now, today's announcement raises the likeliness of another more detrimental breakup happening as an in-out EU referendum is almost certainly going to happen next year. But for now, UK markets revel in the idea of a more business-friendly government to steer the ship for the coming five years, with the pound and UK stocks gathering significant momentum as the votes came in.
UK shares experienced a blue boost as the perceived business-friendly Tories gained enough seats to form a government. The banking sector was one that enjoyed the news, with the likes of Lloyds (6.25%) and RBS (5.12%) in particular enjoying the reduced likeliness of a raised bank levy and bankers' bonus tax.
Homebuilders were among the top gainers of the day, with Labour's threat to limit the rate of rent rises, coupled with a potential mansion tax introduction being averted for now. Barratt Developments (+7.50%), St James's Place (+6.92%) and Persimmon (+6.23%) all jumped higher, signalling the expectations that their earnings will remain unhindered by governmental red tape and policies.
US unemployment dropped to seven-year low
In the US, the Dow Jones is up 250 points, at 18,180, as traders welcomed the fall in US unemployment to a seven-year low. The US jobs report had something for everyone, and the drop in the unemployment rate and the solid non-farms number signalled the US recovery is still underway, and the difficult winter is over, but the downward revision to the previous month's report kept the bulls onside.
Janet Yellen’s comments about high equity market valuations are still on traders’ minds, and the market is not worried about an interest rate hike at the beginning of the second-half of the year. Now that the unemployment rate is at its lowest rate in seven years, dealers are making the most of the gravy train because it could be coming to a halt in September, and today’s employment data wasn’t strong enough to prompt an early rise in rates.
Brent crude short of $70
Signs have emerged that the price of oil has hit a top, with Brent crude in particular falling short of the $70 marker this week. Despite this week seeing the first fall in US oil inventories in 2015, the fact is that we continue to see near record-high oil stockpiles in the US and at some point that has to be sold.
While the $40-50 per barrel price tag will have driven down investment for many US shale producers, a price nearer $70 will likely serve to lead many to start offloading those supplies, while also sending producers back to the well. Thus the likeliness of a protracted selloff in crude appears to have increased significantly this week from both a technical and fundamental standpoint.
Greece fears continue
The news of David Cameron's return to 10 Downing Street sent sterling flying in the early hours of the morning. With a Conservative majority government guaranteed without the shackles of the Liberal Democrats, the City of London couldn’t be happier. There has been a correction in the pound now that the euphoria of an outright Conservative victory has passed, but today’s result will put sterling in good stead as the markets know captain Cameron is at the helm.
The euro is being eroded as fresh fears over Greece are on the horizon again. The repayment deadline due next week is creeping closer and the deadlock is yet to be resolved. The jobs report from the US hasn’t really given us anything new to work with; the market is still looking for an interest rate rise from the US this year, but the mixed jobs report failed to shed much more light on exactly when that first rise will be.