Here is how the markets are reacting to UK prime minister Theresa May’s announcement that there will be a snap general election on June 8.
The pound has rebounded strongly off session lows and is now up 1.6 per cent to $1.2755, its highest since December, as dealers reckon that the ruling Conservative government is likely to increase its parliamentary majority. This could strengthen Mrs May’s hand to deliver a softer Brexit, so the reasoning goes.
Forex technicians are particularly excited by cable — as the sterling/dollar rate is known — breaking above its 200-day moving average, a measure of momentum, for the first time since the UK voted for Brexit in June 2016.
The UK’s stock market was already under pressure before news of Mrs May’s announcement broke, with miners falling on the back of sliding commodity prices, notably a tumble for iron ore.
The FTSE 100, London’s blue-chip index, in the wake of the Brexit vote benefited from a weaker pound, reflecting the hefty reliance of many companies on foreign-based revenues. As the pound rallies, so the Footsie has slumped 2.5 per cent to 7,1147.5, its biggest one-day drop since June 27.
UK government bonds are starting to diverge from global peers. The 10-year benchmark gilt yield, which moves opposite to the price, has swung between 1.00 per cent and 1.06 per cent since Mrs May spoke outside 10 Downing Street.
Weaker equities then helped the 10-year yield drop to 1.02 per cent, down 2 basis points.
Activity in options markets suggests forex traders are not especially agitated by the prospect of another UK election less than 12 months after the Brexit referendum.
The sterling/US dollar three-month volatility gauge, which will cover the June general election, is up 456 per cent to 8.78. The average over the past year is 11.25 and the measure peaked at 18.65 ahead of the Brexit vote in June.
Equity investors are more concerned, although this partly reflects underlying wariness across global stock markets amid a bout of geopolitical stress. The FTSE 100 Volatility index has climbed 9.6 per cent to 16.17, its highest in five months.
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