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UK Election Leads to Hung Parliament Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Fri Jun 09 17 03:40 ET

The event in focus is undoubtedly the UK election that ends in hung parliament, as Conservatives were short of a majority. British pound dived to as low as 1.2683 against US dollar, erasing the gains made following PM Theresa May had announced the snap election in April. EURGBP also rallied as much as -2% although the euro has weakened against the greenback after the ECB meeting Interestingly, European stocks futures recovered after losing earlier in the day. Diminished risk appetite also weighed on commodities. Energy prices remained under pressure with the front-month WTI crude oil contract plunging to a month low of 45.2 before ending the day at 45.72, down -0.18%. The Brent contract dropped -0.42% for the day. On the precious metal complex, the benchmark Comex gold contract fell for a second consecutive day, losing -1.07% on Thursday while the silver contract dropped -1.15%.

UK Election Leads to Hung Parliament

With most of the vote counted, Conservatives have got 315 seats, down from 330 in the 2015 election, while Labors gained +29 seats to 261. The result for the Scottish National Party (SNP) was also shocking as the party only retain 34 of the 54 seats it held previously. Liberal Democrats gained +3 seats more to 12 but its ex-leader and UK's former Deputy Prime Minister Nick Clegg lost his seat to the Labour Party in Sheffield Hallam. Conservatives' loss of majority, while remaining the biggest party, has resulted in a hung parliament. The big question mark now is which parties would emerge to form a coalition government. Recall in 2010, Conservatives formed a coalition government Lib. Dems as a result of a hung parliament. However, Lib dem's former leader Ming Campbell confirmed that it would make "no pact, no deal, no coalition" with either Labour or the Conservatives in case of a hung parliament. The coalition with Conservatives back then has caused much damage to Lib Dems which had to hold responsible for the decisions of the government although many of them were in conflict of the party's perspectives and its supporters. The SNP and DUP (10 seats) are set to be king makers.

The uncertainty arising from a hung parliament hurt sentiment in the near- to medium- term. Even if Conservatives manage to form a coalition government with other parties, the voices demanding Theresa May to step down are getting louder. On Brexit negations, domestic noise over the issue would inevitably be louder than before. Undoubtedly, the election result has deteriorated UK's bargaining power in Brexit negotiation. Meanwhile, there have been rising speculations over another Brexit referendum. Additionally, the rise of Labour's might be perceived as negative by some investors, as Jeremy Corbyn, the party leader, has proposed to re-nationalize industries, increase business and personal taxation and raise government spending. The overhang would remain over the coming few months, at least.

ECB Meeting

The closely-watched ECB meeting was dovish implicitly. Although the staff revised the GDP growth forecasts higher to +1.9% this year, +1.8% in 2018 and +1.7% in 2019 (all up +0.1 percentage point from March), inflation forecasts were revised lower to +1.5% for 2017, +1.3% for 2018 and +1.6% for 2019. The corresponding estimates in March were +1.7%, +1.6% and +1.7%. ECB attributed the volatility in inflation to the movement in "energy prices and temporary increases in services prices over the Easter period". It also pointed out that "measures of underlying inflation continue to remain subdued". Therefore, "a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term". At the press conference, President Draghi noted that modest wage growth is a key reason to the subdued inflation rate. Despite the improvement in the employment market, Draghi indicated that many of the jobs created recently are of relatively poor quality (temporary or part-time job). He added that "we need to be patient... and persistent".

The forward guidance did not have material change. The central bank kept the main refi rate, the marginal lending rate and the deposit rate unchanged at 0%, 0.25% and -0.4% respectively. It suggested these policy rates would "remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases". The reference "or lower" was removed in this meeting. The central bank also affirmed that the QE program would be maintained at the monthly pace of 60B euro. It would continue "until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". The disappointment here is that policymakers have mentioned nothing about potential tapering.

China Data

The market apparently shrugged the Chinese inflation data. headlin CPI accelerated to +1.5% y/y in May, in line with expectations, from +1.2% a month ago. Yet, upstream, PPI inflation decelerated to +5.5% y/y from +6.4% in April. The slowdown was more severe than consensus of +5.7%. Earlier this week, China also released its trade report which shows that trade surplus widened to US$ 40.8B in May from US$ 38.1B a month ago The market had anticipated a bigger surplus of US$ 47.5B.


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