Briefing highlights
- What's at play for markets
- ECB holds rates steady
- After Comey, the economy
- How U.K. election could affect markets
- What to expect from Bank of Canada
- Markets mixed, higher in Europe
- New York poised for stronger open
- Canadian dollar at about 74 cents
- Valeant selling iNova for $930-million
Three blockbusters
Investors have been on the edge of their seats waiting to see how today’s three blockbusters ended.
Some spoilers, though, are making it all a more middle-of-your-seat showing.
Markets are still mixed as the European Central Bank meets, British voters cast their ballots, and former FBI director James Comey prepares to testify in Washington.
First up is the ECB, but the Washington intrigue promises to be far juicier, and British politics could yet have a surprise ending despite what the reviewers say at this point.
Some of the edge is definitely off, but much is still at play.
“While some have called this super Thursday, leaks and releases ahead of today have dampened some of the excitement,” said Elsa Lignos, Royal Bank of Canada’s global head of foreign exchange strategy, noting that, among other things, Mr. Comey released his prepared remarks Wednesday and the British election polls “stopped narrowing, making a Tory win still by far the most likely outcome.”
Here’s a rundown:
The ECB
Europe’s central bank kicked off the morning by announcing little change.
It held its benchmark rate steady, confirmed that its quantitative easing program will run through the end of the year, but it also dropped a previous reference to possibly easing further.
“The governing council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases,” it said.
Markets will be listening closely for what president Mario Draghi now tells reporters.
Comey
His morning testimony to the Senate Intelligence Oversight Committee may be the biggest spoiler, given the release of his prepared text, which sparked a bump in stock prices.
(And no matter what, his testimony is certain to be more titillating than a discussion on an asset-buying program with the exciting name of quantitative easing.)
“In written answers released yesterday, there weren’t any significant revelations that weren’t already in the public domain,” said CMC Markets chief analyst Michael Hewson.
“The testimony did confirm the president himself was not under investigation at the time and that Trump did ask Comey to drop the Flynn investigation,” he added.
“This lack of ‘smoking gun’ managed to pull U.S. markets off their lows and close higher. Even so, while there was nothing in the written answers, that doesn’t mean that something won’t come out when Comey is questioned later today.
Remember, markets surged on the Trump administration’s economic and fiscal pledges, which have yet to pass, so the ability to push those through are key.
“Political distractions hinder fiscal progress in the U.S. and political uncertainty plays its part in keeping bond yields where they are,” said Kit Juckes of Société Générale.
“An optimistic view of the ex-director of the FBI’s testimony is that it could help reduce the uncertainty, one way or the other,” he added.
“More realistically, maybe once it’s out of the way, the underlying performance of the economy, which is dull rather than weak, will drive markets.”
U.K. election
First, pollsters can be wrong.
Having said that, market players see Prime Minister Theresa May’s Tories prevailing even though she was seen to have run a lousy campaign.
“The most likely outcome is stilla Tory majority based on bookies and polls, although the probability of other outcomes could be as high as one in three,” said RBC’s Ms. Lignos.
Watch the exit polls at about 5 p.m. ET, she said, because they were more accurate that the pre-election surveys in the 2015 election.
“Market consensus seems to be that any majority of 50+ is a good outcome for Theresa May (and would see a small kneejerk GBP bounce),” Ms. Lignos added, referring to the pound by its symbol.
“Anything well below that would see GBP selling in thin Asia liquidity.”
The potential outcomes are obvious: Ms. May wins a stronger majority; she wins a lesser majority; there’s a hung Parliament; or, in a not-likely-at-this-point scenario, Labour takes the vote.
“A key consideration from our point of view here is that the GBP already looks quite depressed from a long-term valuation point of view and we think the broader secular bull run in the USD has largely run its course now,” said Bank of Nova Scotia chief foreign exchange strategist Shaun Osborne.
Let’s call this Ms. May’s gilt trip.
A “surprisingly sizable” Tory win would, of course, mean a heavy sigh for Ms. May and her government, said Mr. Juckes.
“Sterling, too, would probably benefit,” he said. “The gilt curve might flatten somewhat and we’d get back to watching economic data.”
A slimmer majority could “limit her ability to negotiate a Brexit deal (increasing the danger of leaving the EU with no deal) and would be slightly GBP-negative,” Mr. Juckes reckoned, adding that attempts to form a minority “would multiply the uncertainty and be more negative for the currency.”
There’s also the possibility of a “working arrangement” between Labour and the Scottish National Party, which would also ding the currency.
But a big drop isn’t likely, no matter the results, said Mr. Juckes.
“Sterling’s cheap, but Brexit will keep it cheap for longer than was the case after 1992 to 2008,” he said.
“It’s a sell, but only against other cheap currencies that have room to rally.”
Markets await Poloz
Also up later in the morning, though not as high on the risk meter, is the Bank of Canada, which releases its review of the financial system, followed by a news conference with Governor Stephen Poloz.
The financial system review is the document that says all those nasty things about inflated home prices and swollen household debt levels.
Observers expect a lot of talk about housing in the wake of Ontario’s new measures to cool down Toronto area markets.
“The past six months have seen housing activity and prices in the Greater Golden Horseshoe rocket higher, only to see the Ontario government step in with cooling measures (which seem to have had an initial impact), trouble at the largest alternative mortgage lender, a downgrade of Canadian banks on housing worries, and warnings from the IMF and a cacophony of others on the risks surrounding housing and household debt,” Benjamin Reitzes, Canadian rates and macro strategist at BMO Nesbitt Burns, said of the central bank’s semi-annual report.
“Some other risks will also be noted, with the prior issue’s sharp increase in interest rates, emerging market stress, and prolonged weak commodity prices candidates to be repeated.”
Markets mixed
Global markets are mixed at this point, but rising in Europe with New York poised for a stronger open.
Tokyo’s Nikkei lost 0.4 per cent, while Hong Kong’s Hang Seng and the Shanghai composite each gained 0.3 per cent.
In Europe, London’s FTSE 100 was down 0.2 per cent by about 7:50 a.m. ET, and Germany’s DAX and the Paris CAC 40 were up by between 0.1 and 0.3 per cent.
New York futures were up, and the Canadian dollar was just above 74 cents (U.S.).
“The Tories would be the preferred party by investors as they are more pro-business than Labour, but given the number of political surprises in the past two years, you can see why traders are on tenterhooks,” CMC Markets analyst David Madden said of the U.K. election.
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