It’s not every day you see somebody do something that has a significant chance to plunge the entire world into chaos. That’s exactly what Theresa May did yesterday.
I’m not saying that she made the wrong move or that she did something stupid. In fact, calling for a snap election on June 8th may prove to be the smartest move of her career. However, there is a chance albeit small, that this could blow up in her face. The world has enough geopolitical risk at the moment, did we really need any more?
Well, at least the markets are moving. Let’s make some money.
The Event Simplified
The Market Reaction
Please note: All data, figures & graphs are valid as of April 19th. All trading carries risk. Only risk capital you can afford to lose.
So what just happened?
The Prime Minister of the UK wasn’t getting along with her fellow members of the government. Pretty much everybody agrees that Brexit needs to happen, the British people voted for it. However, as politicians do, there’s a lot of arguments about how.
Remember, May was never elected. In the wake of the June referendum, David Cameron stepped down as PM, there was a power struggle and May emerged victoriously. Not an ideal position in a democracy.
At the moment, public opinion seems to be in May’s favor but the distribution of parliament is still fixed at the outcome of the last UK elections about 2 years ago.
By holding a snap election now, May will not only be able to squash any comments about her not having an elected mandate, she is also catching her opponents off-guard as nobody really expected to be running a political race right now, and will now have less than 2 months to prepare and mobilize, an unthinkable time-frame (it took Trump more than 2 years of planning and grandstanding to win in the USA).
Think about UKIP (the UK Independence Party) for example. This British party has been running largely on a single platform campaign, to break away from the EU. Now that that is already underway, what slogan are they going to put on their banners?
So what’s the Risk?
Think about a basketball player who is holding a ball at an uncomfortable angle. In order to get a better grip, he must let go of the ball completely and catch it again for better.
The risk, of course, is dropping the ball. The chance of that happening is very small. Only, we’re not talking about a basketball, we’re talking about the world.
This is a nationwide general election so anything can happen. What if one of May’s opponents outlines the risk that she’s taking and uses it to gain strength? What if the people who didn’t vote for Brexit see this as their second chance to vote against it?
With all the geopolitical risk surrounding France, North Korea, Syria, Turkey, Venezuela, South Africa, etc, even the chance of uncertainty in the UK is just adding fuel to the fire.
Reaction to May
The Pound Sterling is confident. As usual, the markets are already pricing in the most likely outcome. A stronger May government.
The GBPUSD has been beaten bad by Brexit and it’s good to see the currency fighting back…
Massive hedge funds and many traders on eToro have now completely closed out their short positions on the pair and it seems we had a bit of a reverse flash crash yesterday evening.
However, we are now well above the average price so selling sentiment has resumed in short term trading.
The FTSE tells an entirely different tale. In this story, a stronger Pound leads to smaller profits and a nation that is getting fed up with democracy is too weary to take on yet another headwind risk event.
Losses in the UK stocks combined with speculation over a potentially messy French election dragged down the entire European session. New York seemed ready to reverse the losses, especially after Bank of America announced a profit rise of 40%. But…
Less than an hour later, Wall Street’s darling, Goldman Sach, announced some poor results for the first quarter. It was too much for the stock market to bear and the Dow Jones ended the day 113 points lower.
Asian stocks aren’t doing too bad at the moment and Europe just opened up volatile but overall flat. Certainly, there’ll be plenty of traders out there looking to buy this dip but beware of further geopolitical uncertainty.
Also, keep an eye on Crude Oil. Inventories will be posted at 15:30 GMT. We’ve seen some pretty weak price action over the past few days. Any losses in the energy sector could easily prove fatal to this fragile market.