MANAMA: With the unforeseen outcome of the Tories falling to secure a majority, the U.K. continues to face a period of prolonged uncertainty as the inconclusive election raises questions about the Prime Minister Theresa May’s chances of remaining in power and being able to govern effectively, says an expert.
“It was an eventful Friday as the UK once again reeled from the third election in as many years – the General elections in 2015 and 2017, and the EU referendum in 2016,” Mihir Kapadia, CEO and Founder of Sun Global Investments, said while commenting on general market outlook.
The EU is scheduled to meet with their British counterparts today to determine and discuss the timeline of Brexit talks. There is growing scepticism in the EU that serious negotiations cannot begin given political uncertainty in London. The weakness of the UK PM has reduced the probability of a hard exit and increased the chances of a soft Brexit.
Friday markets closed with a sharp sell-off in the Nasdaq Index. As we have noted in recent weeks, the Nasdaq’s performance of 2016 was double that of the S&P 500 and Dow Jones. There was a sharp sell-off in technology stocks which have advanced strongly in recent months. The Nasdaq Composite fell 1.8% to 6207.92.
Technology companies in the S&P 500 dropped 2.7%, dragging the broader index down 0.1% at the close. The Dow Jones Industrial Average rose 0.4% to 21271.97. This may just reflect some long overdue profit-taking as analysts question the current high valuations. We believe this a healthy correction rather than the start of a prolonged correction. This decline has followed through in Asia with most indices lower with tech stocks in Japan and Korea falling.
Developed country sovereign bonds fell a little more on Friday. The yield on the benchmark 10-year Treasury is 1 bp higher at 2.219%. U.S. government bonds declined on Friday, which was the third consecutive session of declines after buying had driven yields to their lowest level in nearly seven months. Investors are cautious ahead of new supply (an auction of three- and 10-year notes and 30-year bonds are due on Monday and Tuesday) and the two-day Federal Reserve rate setting which concludes on Wednesday.
The Fed is strongly expected to raise the Fed Funds rate by 25bp to 1% at the meeting. The key issue will be the indications whether the meeting will raise expectations about future rate increases, which have ebbed in the wake of soft economic data.
Apart from an initial 2% drop in the GBP against the US dollar, UK asset prices were relatively calm in response to the UK election results. The FTSE 100 rose as exports are expected to gain form a lower GBP, while the FTSE 250 fell. Gilt yields were stable with the 10-year yield little changed at around 1.00%.”
