The market is still trying to make sense of Friday’s hurricane impacted Non-farm Payrolls report. The US dollar is yet to find its feet and with Columbus Day on Monday we may not find a true reflection of sentiment until the middle of the week. However, in the meantime, sterling traders are positioning for UK political uncertainty which is impacting on UK assets. US inflation remains a key focus for the market which is increasingly pricing in a December Fed rate hike. We look at the outlook for Forex, Equities and Commodities.
UK political risk is rising. The instability of Prime Minister May’s government in the wake of a minority victory in June’s disastrous snap election, however the pressure is mounting even further now. Last week’s Conservative Party conference was seen as an opportunity to re-boot, however after maverick Brexiteer Boris Johnson spent the week stirring up trouble on Brexit negotiations, whilst May coughed and spluttered through a calamitous yet somewhat anaemic key note speech. The knives are sharpening for Mrs May with talk of a number of MPs ready to call for her departure. The weekend press has suggested she will move to reshuffle her cabinet, but how long can Mrs May last as Prime Minister? Perhaps her next mistake will be her last. If this were the case then it increases the risk of (yet) another General Election that the Tories would almost certainly lose. How would the market react to a Prime Minister Corbyn and a Chancellor McDonnell? The Labour Party are already preparing for economic shocks and a “run on the pound” amidst capital flight. With an expectation of considerable fiscal loosening that could drive debt to GDP back towards three figures and punitive taxation for the rich, this may be the early stages of renewed and considerable sterling weakness. The pound had been steadily recovering since the “flash crash” 12 months ago, but suddenly the economic shock of Brexit may not be the only significant risk for UK investors.