Sterling Lifted by Decision to Hold Early British Election

April 18, 2017

British Prime Minister Theresa May will reportedly announce a decision tomorrow to hold a snap parliamentary election on June 8. The previous British election was held in May 2015, and another one isn’t required until May 2020. May, who succeeded the resigning David Cameron last July, had previously been opposed to calling snap elections but apparently changed her mind after concluding she lacks a sufficient domestic mandate needed to negotiate good Brexit terms for her country. ¬†Opinion polls suggest the Conservative Party that she represents will pick up additional parliamentary seats, but snap elections introduce an element of unpredictability. Markets were already contending with a French Presidential election, the first round of which is the Sunday, and German parliamentary elections in September. An Italian election cannot be ruled out either.

The dollar has declined 1.2% against sterling. The greenback also lost 0.5% against the euro and Swiss franc and 0.3% versus the yen and kiwi. On the other hand, the dollar strengthened today by 0.4% against the loonie and 0.6% relative to the Aussie dollar.

With markets reopening after the long Easter weekend holiday, share prices are down in Europe by 1.2% in Greece and Italy, 1.3% in France, 1.9% in Great Britain, 0.8% in Switzerland and Spain and 0.7% in Germany. Markets in the Pacific Rim were mixed, with Hong Kong, Australia and China closing down 1.4%, 0.9% and 0.8% but Indonesia rising 0.5%, Japan up 0.4%, and New Zealand and South Korea edging up 0.1%. U.S. equities opened lower.

The ten-year U.S. Treasury yield fell back three basis points to 2.22%, which is close to a post-election low. The 10-year Japanese JGB yield remains at zero. The 10-year British gilt firmed a basis point.

West Texas Intermediate crude oil and Comex gold fell 0.5% overnight to $52.38 per barrel and $1,285.60 per ounce.

Late Monday, the U.S. Treasury reported February capital flows. There was a net incoming long-term flow of $53.4 billion, but the broadest measure, which includes net short-term capital movements, had a greatly reduced $19.3 billion inflow after $121.2 billion in January.

U.S. housing starts fell 6.8% last month, but building permits recovered 3.6%. Both levels in March lay between January and February levels.

The U.S. industrial production report for March was mixed. Overall output went up by an as-expected 0.5% but only because of an 8.6% resurgence in utilities. The effects of climate change in the first two months of this year, which led to very unseasonably warm temperatures, had depressed utility production by 6.8% in January and a further 5.8% in February. Factory output in March fell 0.4% on month, most in seven months, and was merely 0.8% greater than in March 2016. Capacity usage rose 0.4 percentage points to 76.1%.

The saber-rattling between North Korea and the United States hasn’t subsided, and the confrontation may help President Trump politically. Strains between the new Trump administration and the EU were again in the news as Trump congratulated President Erdogan of Turkey following the narrow passage of the weekend referendum that will enhance Erdogan’s powers.

The Reserve Bank of Australia published minutes from its policy board meeting of April 4. Officials anticipated moderate growth with a gradual rise in core inflation. They are somewhat concerned about excessive mortgage debt and reiterated the view that Aussie dollar appreciation would be undesirable. Australia’s Official Cash Rate has been 1.5% since a 25-basis point cut last August.

The Chinese property market remained hotter than officials would like in March. Property prices went up 0.6% on month and 11.3% on year in spite of restraints on housing that were imposed during the month. More restrictions are possible.

Danish producer prices fell 0.9% in March, but the 12-month rate of increase climbed to 4.3% there.

Brazil’s index of leading economic indicators jumped 1.9% in March, but the index of coincident economic indicators dropped further.

Existing home sales in Canada climbed 1.1% in March to a record high and were 6.6% greater than a year earlier.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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