How Comey testimony, UK polls & ECB policy can steer markets

NEW DELHI: Financial markets in Asian were on the edge on Thursday as investors geared up for three major global events whose outcomes could have far-reaching impact on economics and politics globally.

Stock markets in India and rest of Asia wobbled as investors braced for any surprise from the UK election, a European Central Bank policy meeting and congressional testimony from former FBI director James Comey, fired by President Donald Trump last month.

So why have these events assumed such importance for the financial markets, and how are the outcomes going to impact markets?

Britain snap election
Britain is going to vote in the 'snap election' that Prime Minister Theresa May hopes will strengthen her party’s position and bring the required certainty, stability and strong leadership she needs for the Brexit bargain. May is essentially seeking to increase her majority in Parliament.

A stronger support to her party would lend the British PM the required support to go into the gruelling EU negotiations over Brexit settlement. But that’s what the market should fear the most.

“Investors do not really know what to make of the UK elections. It certainly looks like it is going to be a landslide victory that Theresa May was hoping for, which would have allowed her to have a lot more authority and take a tougher line going into the negotiations. It is actually a negative or a worry for financial markets. They might actually prefer a weaker government, which is going to have to make some concessions to Europe to avoid a hard Brexit,” said Geoff Lewis of Manulif Asset Management.

“But the brutal truth is, after the elections, we are still not going to know for a couple of years what kind of a Brexit deal the UK is going to get. So, it does not really make that much difference. A Labour win would mean a return to nationalisation; the economic policies look very old-fashioned. That would be more of an upset for markets,” Lewis said.

Although surveys show that the gap between the main two political parties has narrowed considerably, May's position as Prime Minister seems secure, said an AFP report.

ECB may adopt hakwish tone?
This week has been hijacked by central banks. First, it was RBI on Wednesday. On Thursday, ECB will review its money policy. There are expectations that the ECB will skip any talk of winding down the quantitative easing (QE) programme.

The European Central Bank is expected to keep its language of forward guidance dovish, but Reuters quoted sources as saying that the central bank may acknowledge an improved economic outlook by removing a reference to "downside risks" in its statement.

ECB’s 60 billion euros per month asset purchases will last at least until December. There are expectations that the central bank may hike interest rates, probably after German elections, before winding down asset purchases.

RBI in its policy statement on Wednesday noted that international financial markets have been lifted by improving global growth prospects, broadly accommodative monetary policy stances of systemic central banks and generally positive incoming data.

That said, lack on strong direction in ECB’s president Mario Draghi’s speech could weaken the euro and, if everything goes right in the US later in the day, it may push the Dollar Index higher. That index has inverse relationship with equities.

Comey’s congressional appearance
US stocks heaved a sigh of relief in overnight trade on Wednesday after written testimony from Comey did not add major revelations about an investigation into Russian meddling with last year's US presidential election. AP reported that former FBI director James Comey will say in his opening statement to a congressional hearing that President Donald Trump told him, “I need loyalty. I expect loyalty” during a January dinner, according to documents released a day ahead of Comey’s planned testimony.

He also confirmed Trump’s statement that Comey told the President several times that he was not personally under investigation, the report said.

Everyone would be glued to the idiot box to know more about how the US President goes about doing his business. Well, it may still hold many surprises. Don't you think?