Asian equity markets fell across the board on Wednesday, following a negative lead from the U.S. on earnings disappointment and lower commodity prices despite a weaker U.S. dollar.
The geopolitical tensions concerning North Korea, the French elections, and growing skepticism around the U.S. administration’s ability to deliver on policy pledges drove investors to treasuries, with U.S. 10-year yields dropping to their lowest levels since mid-November. The yield on Japan’s 10-year yields fell into negative territory earlier today. The more worrying signs are in the shape of the yield curves which seem to be flattening nowadays, an indication of slowing economic growth leading to further selloff in equities. If yield curves continued to flatten further, we’re likely to see a steeper selloff in equities led by banks.
The focus in currency markets remains on the pound. Yesterday’s surprise move by U.K. Prime Minister Theresa May calling a snap election sent the GBP/USD to its highest levels since October. The 400-pip move from low to high is not a reflection of the short-term fundamental outlook for the U.K.’s economy. But traders expect the snap election to lead to stronger negotiation powers with the EU on Brexit terms, thus a softer exit. Today we expect May to win parliamentary support for the snap election, but the reaction on the pound to be mild, given it’s already priced in.
The Prime Minister was heavily criticized by some media yesterday, given that only last month she ruled out an early election, but any politician in her shoes would have followed a similar path given the weak position of the opponents.
Although a new vote will add some new uncertainties, the expected larger Conservative majority from an early election will reduce some of the longer-term noise, and given that the pound is relatively cheap from a fundamental perspective, there’s more potential to see upside moves. However, a lot will depend on the EU side, and whether they decide to take a hard or soft stance.
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