By Mike Bird
European stocks dropped in early afternoon trading Tuesday after
a four-day break, and volatility returned to currency markets as
British Prime Minister Theresa May called a surprise general
election.
The Stoxx Europe 600 index fell by 0.8% shortly after midday in
London, led by a 1.7% drop in the U.K.'s FTSE 100 and a 1.2% drop
in France's CAC 40.
U.S. equity futures followed European stocks down, with
contracts on the S&P 500 and those on the Dow Jones Industrial
Average each down 0.2%.
The pound initially fell sharply against the dollar and euro on
the news that U.K. Prime Minister Theresa May would make an
unexpected statement at 11:15 a.m. London time, down to as low as
EUR1.175 to $1.252.
But after Mrs. May announced that a surprise election would be
held on June 8, sterling jumped higher, rising 0.86% to $1.267, its
highest since early February, and 0.47% to EUR1.186.
Yields on the U.K's 10-year government bonds also tumbled ahead
of the statement, reaching 1% for the first time since October,
rising back to 1.055% shortly after noon in London.
"It seems like people are focusing on the positives. The
straightforward assumption is that she'll win the election and
consolidate her control over parliament," said Viraj Patel, foreign
exchange strategist at ING.
"But this also opens up a big new element of uncertainty, which
could reinforce the case for sterling weakness," he added.
The British government began its formal process of leaving the
European Union at the end of March. Polling currently suggests that
Mrs. May's Conservative Party will be returned to government.
British bank stocks led the declines, with Barclays and Royal
Bank of Scotland down 3.2% and 2.4%, respectively. Most of the fall
came before Mrs. May's statement.
A stronger pound is typically bad for the U.K's flagship equity
market, since the companies on the FTSE 100 make much of their
revenue abroad, and a stronger pound shrinks sterling-denominated
earnings.
In the U.S., Goldman Sachs' first-quarter earnings disappointed
markets, with lower-than-expected trading revenue sending shares
down 2.3% premarket.
Political tremors elsewhere in Europe also reached
foreign-exchange markets.
The first round of the French election will be held Sunday. Two
candidates go forward into the second round on May 7 and the race
has become a four-way split since the rise of left-wing firebrand
Jean-Luc Mélenchon.
"It's nervousness as opposed to concern," said Kit Juckes,
global head of foreign-exchange strategy at Société Générale SA.
"You have four candidates within 5% of each other, so nervousness
would be a sensible reaction."
The nerves stem from the possibility that either Mr. Mélenchon
or far-right candidate Marine Le Pen, who has promised a referendum
on France's membership of the European Union, could outperform and
emerge victorious after the second round.
The euro was up 0.4% against the U.S. dollar at $1.068, but
stress relating to the French election was clear in other parts of
the currency market.
One month euro-dollar risk reversals, which measure the cost to
investors of protecting against a sudden decline in the euro,
touched minus 4.3, the most extreme reading since at least 2011.
More negative numbers suggest investors are paying increasing
amounts to hedge against a currency decline.
"The polls still look too close for comfort," said Emily Nicol,
economist at Daiwa Capital Markets. "For example, one Ifop poll
published Tuesday puts Macron and Le Pen each on 23%, just 3
percentage points ahead of Fillon and the far-left Mélenchon."
The dollar was lower against a basket of other international
currencies, with The Wall Street Journal Dollar Index falling
0.19%.
The spread between French and German 10-year government bond
yields--another indicator of market worries--ranged from 0.767
percentage point as markets opened to 0.711 percentage point. Late
in 2016, before the French election loomed, the spread was as
little as 0.22 percentage point.
In Asia, the Shanghai Composite Index closed down 0.79% after
dropping in late trading. The index fell by 1.6% across Friday and
Monday, in its largest two-session drop since December.
Steel and iron-ore futures--which hit four-year highs in
March--fell sharply in China, where iron-ore imports and steel
production have outpaced physical demand and where the government
is trying to cool a housing bubble. Iron ore futures have dropped
by around a third in price since mid-March.
In Hong Kong, the Hang Seng also closed down, by 1.39%.
Kenan Machado
contributed to this article.
Write to Mike Bird at Mike.Bird@wsj.com
(END) Dow Jones Newswires
April 18, 2017 08:31 ET (12:31 GMT)
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