U.K. Assets Rally as Johnson Landslide Sweeps Through Market
For a while on Friday the only thing more decisive than Boris Johnson’s general election victory was the market reaction that followed.
The pound surged with U.K. stocks and corporate bonds rallied as investors cheered the huge Conservative Party majority in Britain’s national vote. The margin of victory fueled investor hopes the political gridlock and uncertainty surrounding the country’s departure from the European Union would finally be brought to an end.
In a day of dramatic market moves:
- Sterling at one point hit the highest level against the dollar since May 2018 and flirted with the biggest gain in more than two years.
- The FTSE 250 index of equities soared to the highest on record on trading volumes more than 200% above the 100-day average.
- A gauge of regional credit default risk fell to the lowest in more than a decade.
”A lot of money has been waiting on the sidelines in the U.K.,” said Mark Nash, the London-based head of fixed income at Merian Global Investors. “This result should see much of it deployed.”
Investors always favored the prospect of a market-friendly Conservative government that could bring an end to Brexit uncertainty, and Johnson promised all of his lawmakers would back the exit deal he struck in October. Traders were also deeply skeptical of Labour leader Jeremy Corbyn’s plans to overhaul the economy through increased taxation, spending and nationalization of key industries.
By the end of Europe’s trading day the pound had trimmed its surge as the initial euphoria subsided. Sterling was 1.4% higher against the dollar at $1.3342 as of 4:45 p.m. London time. It strengthened 1.4% versus Europe’s common currency to 83.433 pence per euro.
In the stock market, the FTSE 250 surged as much as 5.4% before closing 3.4% higher. The FTSE 100 Index, which is dominated by exporters and therefore vulnerable to currency strength, jumped 1.1% and was matched by the Stoxx Europe 600 Index.
“To me this signals that the worst of Europe’s malaise is behind us,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management in Philadelphia. “The results take away a key risk in markets, and while there are still issues with U.S.-China trade, this U.K. election is one of the big ones. Long sterling is our biggest currency position outright.”
In credit, the pound-denominated bonds of U.K. companies led a rally across European markets. Those issued by banks and companies which faced potential nationalization under a Labour government set the pace. The Markit iTraxx Crossover Index of credit-default swaps on speculative-grade companies fell to its lowest since 2007.
Despite the asset moves there was caution to be found, which may explain some of the pull back. Commentary from investors and analysts alike was bullish but laced with concern about the next phase of Brexit. Trade talks with the EU could prove even more complicated than the process of negotiating Britain’s exit from the bloc, raising the risk of fresh market volatility down the line.
“A strong majority means the withdrawal bill gets through in January,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “I would still be wary of chasing the pound higher at these levels though.”
For now, the options market is suggesting that some traders are ready for calm. A gauge of volatility for sterling over the next six months touched the lowest level since January 2018 as markets prepare for a respite before negotiations over the final trade relationship with the EU begin.
©2019 Bloomberg L.P.