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UK's May Calls for Early Election, Adding Risks to the Unpredictable Environment Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Apr 18 17 22:33 ET

The news that moved the market most was undoubtedly UK PM Theresa May's call for a snap election in June. Her announcement sent the pound broadly higher with GBPUSD soaring to the highest level in more than 6 months and registering a daily gain of +2.2%. EURGBP slumped to a level not seen since last December before recovery. The pair recorded a one-day loss of -1.36%. UK equities sank with the FTSE 100 falling -2.46% at close. World equity markets also suffered. The broad European Stoxx 600 index was down -1.11%. Wall Street weakened with DJIA and S&P 500 indices slipping -0.55% and -0.29% respectively. Shares in Asia fell across the board in the morning session on Wednesday. Increased political risks in Europe, accompanied by unsettled geopolitical tensions in Korean Peninsula and Syria, continued to support gold. Continued hovering around the 5-month highs, the benchmark Comex contract gained for a 5th consecutive day. Oil prices declined on concerns over surging US production, while Syria tensions have heightened the uncertainty of the OPEC meeting in May. The front-month WTI crude contract fell to the lowest level in almost 2 weeks before settling at 52.41, down -0.46%, while the Brent contract failed to close above US$55/bbl for the first time in 2 weeks. Safe haven demand also supported US Treasuries, with 2-year yields slipping -4 points to 1.17% and 10-year yields down -7 points to 2.18%.

UK PM Theresa May announced that she would seek MPs' support for an early general election to be held on June 8. The news came in less than a month after her affirmation that "the next election will be in 2020". The rationale behind such move is to consolidate her power after Brexit was formally triggered in late March. A landslide victory of the Conservative Party would strengthen May's mandate in the 2-year Brexit negotiations. The strong rally of the sterling suggested that the market was confident that the election would serve its purpose. Indeed, latest opinion polls showed that 44% of the British people support Conservatives, compared with Labor's 23%. Support for LibDem stayed at low teen. Meanwhile, 50% of interviewees indicated that May would make the best PM Minister, compared with 14% for Labor's Jeremy Corbyn. It is usually positive for a country's currency if the ruling party retains power in an election, as it means lower uncertainty. Sterling's volatility would remain elevated from now until the election. Yet, short-term rebound does not alter the currency's long-term bearishness should the tough Brexit negotiations eventually return to the spotlight.

Oversupply concerns continued to haunt the oil market. Traders took profit from previous crude oil rally after a DOE/EIA report projected that US shale oil production in May would post the biggest monthly increase in more than 2 years. The drilling productivity report estimated that output might increase +0.12M bpd to 5.19M bpd. Meanwhile, the market is awaiting the upcoming OPEC meeting on May 25. The topic for discussion would extension of the output cut deal. While Saudi Arabia has reiterated its intention to extend the deal, whether other OPEC members/non-OPEC producers would agree remains unknown. The situation has turned more unpredictable after US' airstrike on Syria. While Saudi Arabia supports the US, Russia and Iran condemned the act. The different reaction was inevitably driven by the countries' relations to Syria and their strategic interest in the area.

On oil inventory, the industry-sponsored API estimated that crude oil inventory dropped -0.84 mmb in the week ended April 14. However, gasoline stockpile rose +1.4 mmb while distillate fell -1.8 mmb. The DOE/EIA due today would probably show that crude oil inventory dropped -1.47 mmb. For refined oil products, gasoline and distillate stockpiles were down -1.94 mmb and -0.99 mmb respectively.

On the dataflow, Eurozone's final CPI probably stayed unrevised at +0.4% m/m, and +1.5% y/y, in March. The core reading would also likely remain unchanged at +0.7%. In the US, the Beige Book of the economic conditions would be released.


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