SYDNEY: Sterling stole center stage in Asia on Wednesday amid speculation Britain’s surprise decision to call a snap election could ultimately deliver a more market-friendly outcome in its divorce from the European Union.
Safe-haven bonds also held onto most of their recent gains ahead of presidential elections in France and on escalating tensions between the United States and North Korea.
Equities were largely sidelined with futures pointing to opening losses for German and UK bourses, while E-mini futures for the S&P 500 ESc1 were all but flat.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.6% to the lowest since mid-March.
Japan’s Nikkei managed to steady for the moment, but Shanghai extended its recent retreat with a drop of 1%. The Chinese market has fallen for four straight sessions on concerns over tighter regulations.
Sterling was just off a six-month top against the dollar having surged when British Prime Minister Theresa May called an early general election for June 8, seeking to strengthen her party’s majority ahead of Brexit negotiations.
“We expect that the PM’s gamble is likely to buy her more time as well as room for maneuver in the Brexit negotiations as she will depend less on fringe groups in her own party,” said Citi’s chief global political strategist, Tina Fordham.
“That may reduce the risk of a negotiation failure and thus ‘chaotic Brexit’, but also of the UK remaining in the Single Market in the long-term or even reversing the decision to leave the EU.”
The pound was lording it at US$1.2824 on Wednesday having shattered a months’ old trading range with a jump of 2.2% overnight. It also cleared the 200-day moving average for the first time since June, putting the squeeze on a raft of speculative short positions.
Reflation trade deflates
The dollar recouped just a little of its broader losses in the Asian session, rising 0.15% against a basket of currencies. The euro stood at US$1.0718 after touching a three-week top of US$1.0736.
Against the yen, the dollar was hovering at 108.65 having been as low as 108.39 earlier.
The dollar was undermined in part by an eroding interest rate advantage as US bond yields dived to five-month lows. Yields on 10-year Treasury paper sank to 2.17%, a world away from the 2.629 peak seen in March.
A run of disappointing US economic data and doubts the Trump administration will progress with tax cuts have quelled expectations of faster inflation and boosted fixed-income debt.
That, in turn, has taken the steam out of Wall Street. The Dow fell 0.55% on Tuesday, while the S&P 500 lost 0.29% and the Nasdaq 0.12%.
Goldman Sachs (GS.N) lost 4.7% in the largest daily drop since June after its earnings missed expectations as trading revenue dropped.
In commodity markets, profit taking nudged gold down 0.4 percent to US$1,287.10 an ounce, and away from Monday’s peak of US$1,295.42.
Oil prices slipped as US crude stockpiles fell by less than expected and a US government report said shale oil output in May was likely to post the biggest monthly increase in more than two years.
Brent crude LCOcv1 was last down 16 cents at US$54.73 a barrel, while US crude CLcv1 fell 12 cents to US$52.29.