Brian Nick, Chief Investment Strategist, TIAA Investments
June 9, 2017
“It seemed to be a good idea at the time.” Vin, from the movie, “The Magnificent Seven.”
On April 17, British Prime Minister Theresa May stunned the political world by calling for a “snap” (early and previously unscheduled) election to be held on June 8. Acting from a position of strength, she hoped to gain a greater majority in Parliament, win an election on her own—she replaced David Cameron after the Brexit vote—and strengthen her hand in Brexit negotiations with the European Union (EU), due to start on June 19.
Early polling showed her Conservative Party (the Tories) with a substantial lead. However, that margin began to shrink amid a series of missteps by the May campaign and challenges to her record on security after the U.K. suffered three terrorist attacks in three months. As home secretary from 2010-2016, she oversaw reductions in police forces.
Brian Nick, Chief Investment Strategist, TIAA Investments
Her opponent, Labour’s Jeremy Corbyn, seemed ill-suited to seize the upper hand on the domestic security matter. His focus on welfare issues, though, appealed to young voters, allowing him to benefit from the 20-point rise in turnout among 18-24 year olds since the U.K.’s 2015 general election.
The Tories won 318 seats, down from the 331 they had won in 2015 and eight short of the 326 needed to secure a majority—a hung Parliament. May now will attempt to strike a deal with Northern Ireland’s right-wing Democratic Unionist Party (DUP) in order to gain the seats necessary to govern.
With the Federal Reserve’s June 14-15 meeting around the corner and central bankers quieted by the Fed’s self-imposed blackout period, markets also tuned into the European Central Bank’s June 8 policy meeting. As expected, the ECB left interest rates unchanged. Significantly, though, the central bank tweaked its closely watched forward guidance by dropping a reference made in earlier policy statements that rates could be lowered in the future. Markets viewed this omission as the ECB’s first step toward scaling back its aggressive quantitative easing (QE) program. The ECB also confirmed that it will continue QE until the end of the year, or beyond if necessary, welcome news for peripheral Europe (including Ireland, Portugal, and Spain). These countries all benefit from high levels of central- bank-induced liquidity.
Rounding out the June 8 happenings was testimony by former FBI director James Comey before the Senate Intelligence Committee. Markets were anxious that he would disclose details about his interactions with President Donald Trump and Russia’s alleged involvement in the U.S. election that could further derail the administration’s pro-growth agenda. The hearing shed little new information, as Comey’s remarks largely echoed a written statement he had released the day before.
How did markets respond to this late-week news barrage? Overall, pretty well. Not surprisingly, the British pound slumped (1.8%) against the U.S. dollar on June 9, closing the week at $1.27. This decline supported U.K. exporters, helping the FTSE 100 Index rally hard to finish roughly flat for the week (in local currency terms). Europe’s broad STOXX 600 Index also ended on an up note but lost ground for the week. In the U.S., the S&P 500 retreated from the previous week’s record high.
Meanwhile, U.S. Treasury yields rose gently as fixed-income markets stayed calm, with the bellwether 10-year note ending the week at 2.20%. (Yield and price move in opposite directions.) Among non-Treasury sectors, emerging-market (EM) debt remains an outperformer, bolstered by ongoing U.S. dollar weakness. Also supporting the asset class: accelerating growth in Europe, given its strong trade and financial partnership with the EM sphere, and solid technical factors, as demand for EM debt has been outstripping new issuance.
Current updates to the week’s market results are available here.
Across the Atlantic, German factory orders stumbled by a more-than-expected 2.1% in April. Industrial figures are notoriously volatile, though. In March, orders surged 1.1% amid strong foreign demand. And Eurozone investor sentiment climbed in June for the sixth consecutive month, to its best level since 2007.
On June 3, renowned rock climber Alex Honnold became the first person ever to climb El Capitan, Yosemite National Park’s 3000-foot granite wall, without a rope or other safety gear. Honnold completed his ascent in a remarkable 3 hours and 56 minutes. Climbers consider this to be the greatest feat in the sport’s history, their version of the moon landing.
So what about the U.K. elections, the latest brick in the wall of worry that investors have been climbing? In our view, increased political uncertainty in the U.K. is a near certainty. The Conservative Party will find its leadership position challenged and will need to bargain with other parties in order to pass new legislation. In addition, another round of elections can’t be ruled out over the next 6-12 months. The rickety coalition with the DUP will make a “hard” Brexit, or clean break from the EU that May has promised, more difficult to accomplish. A “soft” Brexit, which might involve some form of membership in the EU, is back in play.
The week’s events haven’t changed our view of the U.K. equity market; we have not been and are now not currently favorable on U.K. shares. In contrast, we still expect Eurozone and emerging-market stocks to outperform over the next few years, fueled by more attractive valuations and their prospects for superior growth.
© 2017 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA), 730 Third Avenue, New York, NY 10017