UK Elections are here ... start biting your nails now!!
Week Commencing Monday 4th May 2015
This Week in Brief
In the UK we have some economic data releases, however all eyes will remain on the general election results. We expect some firm figures around Friday lunchtime, so expect markets to start building the picture around then.
In Europe, Greece is expected to make a series of large payments mid-week amongst growing speculation that it is out of cash. This should be the event to watch, however we also have German factory orders and a swath of industrial production figures from France and Italy to enjoy!
In the US we expect the unemployment rate to drop by 0.1 percentage point to 5.4 percent, while factory orders, ISM non-manufacturing index all look set to disappoint. Given the troubles in Greece, coupled with the uncertainty of the UK election, we expect the US Dollar to shrug off bearish economic releases and be profoundly robust for the remainder of the week.
Overriding Market Themes
We start this week with the all-important UK general election, which without doubt will dictate Sterling’s performance for the week. The latest seat projections continue to suggest that no party will be able to raise a majority on their own, and that a hung parliament is the most likely outcome. Indeed, it is starting to look as if neither the major parties will be able to form a government without the support of at least 2 coalition parties. The first indicators that markets will take heed of are exit polls, which should begin to paint a picture of the potential balance of power come Friday morning. We do not expect counting to have been concluded until early Friday afternoon. Given that the result of this election remains highly uncertain, coupled with a possible lengthy coalition negotiation process, we expect some severe headwinds on both Sterling and UK equities as we move into next week. That said, implied volatility remains at roughly the same level prior to the slightly more certain 2010 election, so we believe that the possibility of a market collapse as stated by some parties is unlikely in our view.
Over in Europe, it appears the economy is picking up somewhat according to official figures released earlier in the week. The European Commission said it was revising its growth forecasts to 1.5 percent from 1.3 percent earlier, pushing the zone far above the 0.9 percent growth figures published last year. Indeed, Eurozone GDP could well beat both US and UK growth in the first quarter of the year, the first time since 2011 that it had managed to do so! The ECB’s recent policy of large scale bond buying has helped by driving down interest rates, and the weaker euro has benefited exporters. However, we very much doubt that people are ready to declare that the Eurozone is back in business! Europe formally climbed out of recession two years ago, but has since pivoted between stagnation and extremely low growth, and is yet to achieve the same level of output it had prior to the financial crisis in 2008.
GBP This Week
As noted above, Thursday’s general election should weigh on GBP as political uncertainty is confirmed. Aside from the election, April construction and services PMI are both due to be released on Tuesday and Wednesday respectively. The consensus is expected to see construction drop to 57.3 from 57.8 while services is expected to decline to 57.5 from 58.9 last month.
USD This Week
In the US, payroll indicators will likely be the defining point in the economic calendar, with a print expected significantly above forecast expected. Furthermore, we expect another reduction in the unemployment rate to 5.4 percent and average hourly earnings should rise 0.3 percent on the month. Additionally, factory orders, ISM non-manufacturing index and unit labour costs are all expected this week. Our consensus is for slightly lower than expected prints, however given the current state of Europe and the uncertainty in the UK, we expect a robust US Dollar as we move towards next week.
EUR This Week
Euro area data this week is likely to weigh on the EUR, especially given the continued concern surrounding the upcoming Greek payments which are due to clear by the end of the week. We forecast April manufacturing and services PMI to be confirmed in at 51.9 and 53.7 respectively. Likewise, German factory orders are likely to increase 0.5 percent on the month, while industrial production is set to disappoint with a negative print. Similarly, French and Italian industrial production is also expected to come in -0.4 percent and -0.2 percent respectively. All round, this should be a poor week ahead for the Euro, especially if there is any form of total or partial default in payments from Greece.