Friday 21:00 BST
● Pound pummelled as UK election delivers hung parliament
● FTSE 100 boosted by foreign currency earners
● Wall Street hit by technology sell-off, Nasdaq slides
● Yen, gold and Treasuries slip
● Oil prices rally after turbulent week
Wall Street’s main equity indices secured a fresh round of record highs in early trade while European stocks ended firmer and the Nikkei 225 in Tokyo regained the 20.000 level.
And there were few signs of broader risk aversion with US Treasuries, the yen and gold all moving lower. Oil prices bounced after a volatile few days.
“Whilst a hung parliament was not the specific outcome that many expected, asset prices in the UK — and to a certain extent globally — already discounted a period of extended political uncertainty given the complexity of delivering on the outcome of last year’s EU referendum,” said Paras Anand, chief investment officer for European equities at Fidelity International.
“Simply put, that we are facing a period of political uncertainty is nothing new.”
Sterling was down 1.8 per cent against the dollar at $1.2723, off an earlier low of $1.2635. The pound was down 1.6 per cent versus the yen at ¥140.24 while the euro was up 1.6 per cent at £0.8795.
John Higgins at Capital Economics noted that the election result was no less of a surprise than the UK’s vote for Brexit, after which sterling fell very sharply.
“So why has the decline in the pound, and the reaction in financial markets more generally, been so much less this time around?” he asked.
“The key reason is the relative importance of the implications of the two votes. The result of last year’s referendum set the UK on a course to leave the EU, with potentially adverse consequences for the UK economy.
The outcome of this election is only likely to affect the timetable and outcome of the negotiations surrounding the UK’s departure. Brexit remains almost inevitable.”
And not all market watchers were downbeat about the impact of a hung parliament. “The silver lining of the election result for markets is that it opens the possibility that what appeared to be a rapid march by Theresa May and her team towards a hard Brexit may have been halted,” said Nicholas Brooks, head of economic and investment research at Intermediate Capital Group.
The FTSE 100 equity index rose 1 per cent to end just 20 points short of its record close, reflecting the potential benefit of sterling’s weakness to the large number of foreign currency earners in the gauge.
The pan-European Stoxx 600 index pulled off a low of 387.56 to close 0.3 per cent higher at 390.39.
Across the Atlantic, the S&P 500 index, Nasdaq Composite and Dow Jones Industrial Average all hit record intraday highs in early trade, but subsequently came off the boil amid a late sell-off for technology stocks.
The S&P ended 0.1 per cent lower at 2,431, having earlier hit 2,446.20. The day’s move left the benchmark index down 0.3 per cent for the week.
The Dow did manage to secure a record close, of 21,272, after earlier breaking above 21,300. The S&P tech sector fell 2.9 per cent, while the Nasdaq Composite finished 1.8 per cent weaker.
The CBOE Vix index, a measure of implied volatility in US stock markets, touched a two-decade low of 9.37 in early trade before it too reversed course and closed up 5.3 per cent at 10.70, the highest finish since May 23.
Asia-Pacific equities were mildly mixed. Hong Kong’s Hang Seng fell 0.1 per cent and on the mainland the Shanghai Composite gained 0.3 per cent.
In Australia the S&P/ASX 200 was flat as energy stocks continued to be pressured by recently declining oil prices, while Japan’s Topix index added just 0.1 per cent.
But the Nikkei 225 rose 0.5 per cent, thanks in large part to a jump for SoftBank, which announced it would buy robotics group Boston Dynamics from Google owner Alphabet. SoftBank was also getting a bounce from Alibaba, in which it holds a stake, and which rose 13 per cent in the US on Thursday following bullish sales projections.
There was a general sense of relief in US markets that the congressional testimony of former FBI director James Comey on alleged Russian involvement in the US election had failed to spring any big surprises.
“Mr Comey commented rather disparagingly about Donald Trump as a person and made it clear repeatedly that in his view the president was prepared to ruthlessly lie,” said Lutz Karpowitz, currency analyst at Commerzbank.
“For the FX market, this public humiliation of the president was not sufficient yet to trade the dollar weaker or stronger. For some time now, the FX market has ignored political turbulence from Washington.”
Nevertheless, the dollar index — a measure of the currency against a weighted basket of peers — continued to pull away from a seven-month low of 96.51 struck at the start of the week.
The gauge was trading at 97.28 on Friday, up 0.4 per cent on the session — reflecting not only sterling’s steep decline but also a further 0.2 per cent dip for the euro to $1.1192.
The single currency came under modest pressure on Thursday after the outcome of a policy meeting of the European Central Bank was widely viewed by market participants as dovish.
The central bank dropped its easing bias on interest rates and said that it now judged the risks to the eurozone economy to be “broadly balanced”, which was an upgrade to its previous stance.
But the ECB maintained its pledge to expand quantitative easing if conditions deteriorated and confirmed that its programme of asset purchases would continue until the end of the year. It also lowered its inflation forecasts.
“The ECB removing its easing bias but also lowering its 2017-18 inflation forecasts projects a relative flattening of the euro [yield] curve which will moderately weaken the euro,” said the FX strategy team at Morgan Stanley.
Meanwhile, the dollar was up 0.2 per cent cent versus the yen at ¥110.20 as the UK election results failed to spark a rush by nervous investors into so-called “haven assets”. In a similar vein, gold was down $9 at $1,269 an ounce.
The lack of contagion helped push the yield on the 10-year Treasury note — which moves inversely to its price — up 1 basis point to 2.21 per cent, and that on the two-year was up 2bp at 1.34 per cent.
The 10-year German Bund yield rose 1bp to 0.27 per cent.
The focus will now turn to a widely expected rate rise from the Federal Reserve next week.
Brent oil settled 0.6 per cent higher at $48.15 a barrel. The international crude benchmark tumbled more than 4 per cent on Wednesday — and touched a five-week intraday low on Thursday — as news of a rise in US crude inventories rekindled doubts about the potential impact of output cuts by Opec and non-Opec producers on global supplies.
US West Texas Intermediate was up 0.5 per cent in late trade at $45.88.
Additional reporting by Hudson Lockett in Hong Kong
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