UK Parliament

The big day that traders have been anticipating all week has finally arrived. Stocks, commodities and currencies have been steady, waiting for potentially significant developments today.

Markets tend to reflect the combined expectations of participants at any given time, so the reactions may depend on whether there is a surprise and if so, whether the surprise is positive or negative and whether it's a small or large surprise. 

First up is the ECB meeting. The decision and statement are due at 7.45am (EDT) with the more import‎ant Draghi press conference at 8.30am (EDT).

Euro pairs in focus around ECB meeting

Euro pairs are the main market in focus on this news. Following Emmaunel Macron's win in France, which was seen as a victory by pro-Euro forces over Euroskeptics, the euro has been rallying. Gains have been driven by expectations that multiple setbacks for the populists and Euroskeptics, plus Merkel opening up a lead in Germany, could enable the ECB to cut back on stimulus sooner. 

Expectations have been for the ECB to hint normalisation and that this could be accelerated, though this is tempered by recent reports that the inflation forecast could be lowered. A slightly hawkish shift may not have much impact. A strong hint toward a coming normalisation move could boost the euro, while leanings toward ongoing‎ dovishness and stimulus could send the euro sharply downward.

Comey set to testify

Secondly, former FBI director James Comey is set to testify to the Senate Intelligence Committee, starting at 10am (EDT) today. His prepared remarks were released yesterday afternoon, so the question and answer session may be more important. The big impact for trading in the US dollar and US stocks from this is whether or not this encourages politicians to try and impeach President Trump. The prepared remarks suggest the answer is no but at the same time is likely to encourage investigators to keep digging. The testimony is likely to generate a lot of noise in the media and may continue to distract the administration and Congress, potentially delaying or disrupting pro-business reforms. It would take a big surprise to knock the Federal Reserve off course toward a big rate hike next week. 

UK election brings GBP pairs into focus

Third, is the UK election where voting is underway. Polls close at 5pm (EDT),  with exit polls due shortly afterward. The main impact of the results is likely to be on GBP pairs, particularly GBP/USD and EUR/GBP, and the FTSE. Traders may view the results in terms of whether they enhance or undermine the government's position in Brexit negotiations with the EU. In recent months, developments or polls favouring the Conservatives and a hard Brexit have boosted the pound.

Based on this, UK market action may depend on how well the Conservatives do at the poll that counts. Recent pre-election polls have been all over the place, showing Conservative leads varying between 1% and 12% averaging about 7%. Sterling advanced on Wednesday and has been holding on to the gains today, suggesting cable is most likely pricing a moderately increased Conservative majority, say somewhere around the 64 seat majority forecast by Lord Ashcroft’s model. A majority of over 100 seats could push the pound higher and send cable back above $1.3000, with next technical resistance near $1.3150. A small Conservative majority could send sterling down slightly, say back toward $1.2900 or even $1.2800. 

The Black Swan (low probability, high impact) scenario lurking out there that traders should keep in the back of their minds is that a loss of the Conservative majority could send sterling down sharply. This seems unlikely as Conservative parties in many countries have tended to poll below their actual support in recent elections. 

Generally speaking the FTSE may continue to trade in the opposite direction of GBP, with a sell-off in stocks possible if the Conservatives win big and sterling rallies. On the other hand, a surprisingly strong showing by Labour which could be bearish for sterling, could be bearish for stocks in the longer term as well, given Labour’s agenda. 

Today’s developments may also have an impact on capital flows out of defensive havens depending on what they mean for political and economic uncertainty. Surprises that raise fears could send gold and the Japanese yen higher, while news that meets expectations or eases concerns could spark corrections of the gains these two markets made earlier in the week.

Although likely to be overshadowed by developments elsewhere, traders in Canada should note that the Bank of Canada is releasing results of a review of Canada’s financial system today. This could have an impact on trading in Canadian financial stocks. 

Corporate news

There have been no major corporate developments this morning. 

Economic news

Significant announcements released overnight include:

Japan GDP            street 2.4% vs previous 2.2%
Australia trade balance        street $2.0B

China trade balance        street $47.8B
China exports            street 7.2%
China imports            street 8.3%

Germany industrial production    street 2.1%
Eurozone GDP            street 1.7%

Upcoming significant economic announcements include:

12:45pm BST      ECB interest rate and QE decision    no changes expected
1:30pm BST        ECB Draghi press conference
8:30am EDT

8:15am EDT        Canada housing starts        street 202K
8:30am EDT        Canada new house prices    street 3.3%

8:30am EDT        US jobless claims        street 240K

10:00am EDT      US former FBI Director Comey testimony to Senate Intelligence Committee

10:30am EDT       Bank of Canada financial system review
10:30am EDT       Bank of Canada Poloz and Wilkins press conference

10:30am EDT       US natural gas            street 99 BCF

5:00pm EDT        UK election voting ends, exit poll results

 

Heightened market volatility is likely over the election period, which could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.

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