The world's gone mad. The markets ..... not so much . Some quick thoughts on a remarkable morning .....

Friday 9th June 2017


The world's gone mad. The markets ..... not so much . Some quick thoughts on a remarkable morning .....


No wonder the topic of low volatility is so hot right now. By any standards, yesterday was a BIG day:

The President of the United States is accused of lying and demanding loyalty to himself rather than the law. Frankly, and despite the suspicion that he should have resigned on the spot, his accuser carries more credibility than the President. Market reaction : virtually none.

The European Central Bank drops it's easing bias .... finally. Attention is drawn to continuing but cautious expectations of rising growth and falling unemployment. Market reaction ? Not much .... in fact, what there was of it centered around falling estimates for inflation and the Euro is marked DOWN a touch.

UK PM achieves the near-impossible and pulls off an even bigger political miscalculation than her predecessor David Cameron, he of the great Brexit gamble. A truly dire election campaign sees an early poll lead of over 20% morph into the Tories losing their majority and the prospect of a hung parliament.  Commentators have been agreeing all week that a hung parliament is the worst possible outcome for markets. Market reaction : Aha , here's one ! Unsurprisingly, Sterling takes a fall but a 2 cent fall in cable could be considered pretty mild in the circumstances, and actually UK stock indices move higher on the back of the benefits of a weaker currency to the profits of major corporations.

If you were to add in oil prices remaining under the cosh whilst the row between Qatar and its neighbours threatens to become more than just the latest example of the kind family spat OPEC goes through from time to time, you might wonder if you were missing something .... several things, in fact.

The truth is that oil prices are still suffering from a glut of supply and a sharp upside reaction would require a real and major disruption rather that the potential for one ; the ECB's position was well signposted and if the slight change in forward guidance signifies an end to concerns about DEFLATION, then the weakness of positive INFLATION means a cautious ECB is not yet likely to embrace any monetary tightening ; and as for Trump and the UK , it's just too early to know where exactly these events will end up. With Mr Trump, we noted only yesterday how markets have been able to ignore presidential scandals of the past. It may be that things would have to go a lot further before the markets feel that they have to write off the chances of the president enacting his stimulus measures once and for all due to the President being .... well, impeached. It may also be the case that the markets will be pricing in much lower levels of stimulus by that time anyway.

And the UK ? A true imponderable ..... can Theresa May really run a minority government in coalition with the Democratic Unionists say ,with her standing so damaged ? Who are the candidates to replace her ? No really, who are they ? If the prospects for convivial Brexit negotiations were remote beforehand, what are the chances of a less-than rock hard Brexit now ? Does the UK  face the prospect of another election (oh God, tell us it ain't so ...) ? If it happens, and the Labour party get into power, can their version of old-fashioned socialism (as opposed to mere anti-austerity) work while competitor nations reject such a solution at the polls ?

Low volatility may be the overriding theme in markets this year, but you've got to believe that if anywhere is going to buck the trend, it's got to be the UK.