Politicians are driving the market insane.
The U.K. is up for another vote. This time in June. The outcome will absolutely be a referendum of Brexit, once and for all; case closed.
This latest round in the "should we stay or should we go" saga pits the conservative Tory Party of Prime Minister Theresa May against her rival Jeremy Corbyn of the Labor Party. May called for the snap election because she thinks her opposition is weak. And if her party wins, she will have a mandate to take with her to the European Parliament to get them out of the Union by 2019. It's a risky move, remarkably similar to the bet her predecessor David Cameron once took. But it looks like she has the public's support. With that, the Brexit disaster is about as right a call as the Chinese hard landing.
Theresa May's party has more support than other individual parties, despite the constant beating... [+]
Prime Minister May surprised the country on Monday with her unexpected call for a general election designed to expedite the Brexit process. Should she win, which seems likely based on recent popularity polls, it strengthens her position against the European Union, whose leaders have been fairly hellbent on making this as painful a process as possible for the U.K. May currently does not have a powerful hand at home and is facing still resistance from the left, including Labor, a party that was destroyed by Tony Blair for his support of the Iraq War. May needs to win to firm up support in the House of Commons.
The vote is still a ways off. Anything can happen between now and June. But more than a year into this Brexit thing and the prediction that banks would be fleeing for Frankfurt and investment would dry up have been far off the mark. So far, only one bank has said it was leaving; Lloyds of London is supposedly heading to Brussels, the E.U. capital, and hardly a haven of fixed income and M&A. But...knock yourselves out, boys.
On Monday, A.T. Kearney released their 2017 Foreign Direct Investment Confidence Index. The U.K. rose a spot to No. 4, taking over Canada's place. (Sorry Justin.) Last year, the U.K. was tied with Japan for the top spot for foreign direct investment (FDI).
The improvement "reflects the country’s strong long-term fundamentals and could indicate that businesses currently only in continental Europe may be seeking a foothold in the U.K. market because of Brexit," report authors led by Paul Laudicina wrote. The United States was No.1, followed by Germany and China.
Despite the bullishness for the U.K., the FTSE 100 fell on Monday on the news. Some see it as just another knee-jerk reaction. One look at a secondary indicator here, the pound, and it seems like the forex market is less worried about the June vote. Brexit is happening. It won't be a hard landing.
"The move makes sense for her. She is widely popular and will very likely win and gain more leverage in Parliament," says Stephen Simonis Sr., chief currency consultant for FXDD Global and former Managing Director of Global FX Markets at BNY Mellon. An early election also means she won't have the 2018 general election interrupting the Brexit negotiations.
Fresh off of delivering a promise to voters to invoke Article 50 before the E.U., the Tories enjoy an 18 percentage point lead over Labor. If poll numbers continue to favor the Tories, snap elections should enlarge the 17 seat-parliamentary majority May now enjoys.
During the Brexit referendum, investors were looking at safe havens. Gold rose half a percent on Monday, with the iShares 10 Year Treasury Bond ETF (IEF) rising 0.57%. All of the major eurozone ETFs fell on Monday, with Germany doing the best and Italy and France doing the worst.
The pound experienced the most volatility, but recovered all the losses quickly. The downward move confirmed that the there is a big support at 1.2550. "The pound is pricing in a victory for May," says Adrienne Murphy, chief market analyst for AvaTrade.
The worry before was that the conservatives would get frustrated at the lack of progress in the House of Commons. In such a scenario, they could push for a complete break and a move to the World Trade Organization as an option, let them deal with the fall-out. But a successful election gives her the mandate to pursue her own Brexit strategy. "My sense is that a stronger mandate and more time would allow a more patient approach and a softer Brexit," says Keith Wade, chief economist and strategist for Schroders. "She will be able to pursue it on her own terms."
