Theresa May’s lead narrows; potential coalition looms

1. May Day

Britons go to the polls on Thursday in what is shaping up to be a much closer race than expected only a couple of weeks ago. When Prime Minister Theresa May called the general election on April 18, her ruling Conservative Party held a 24-percentage-point lead over Jeremy Corbyn’s Labour Party. Sterling rallied on her announcement as traders bet that a landslide victory for May (she currently has only a 10-seat majority) would strengthen her hand in the Brexit negotiations. But polls show that lead is now down to as low as 3 percentage points, suggesting a hung parliament is a possibility. Could a Labour-led coalition even deliver the previously unthinkable – Prime Minister Corbyn? Sterling has drifted lower, and on a trade-weighted basis is actually lower than it was on April 18. There’s been no dramatic slide though, and markets are still betting on a May victory. But no potential is being dismissed out of hand now.

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2. Exit signs

Financial markets seem relaxed about the prospect of the European Central Bank closing the door to extra easing when they meet on Thursday. Sources told Reuters that policymakers are set to take a more benign view of the economy and will even discuss dropping some of their pledges to ramp up stimulus if needed. This will set the stage for the ECB to signal a winding down of their massive bond-buying program in September, three-quarters of economists polled by Reuters believe. Yet Germany’s benchmark Bund yield remains rooted near one-month lows and a separate poll of bond market specialists forecast it will be barely 30 basis points higher in the wake of the September meeting. This all suggests there will be no repeat of the “taper tantrum” that greeted the US Federal Reserve’s exit talk in 2013, although the cautious tone coming from ECB chief Mario Draghi and his inner circle indicates they are not counting their chickens just yet.

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3. Inflation cooling

Whatever the impact on polar bears, sea levels or US coal-mining communities of President Donald Trump’s decision to withdraw the United States from the Paris accord on efforts to fight climate change, it is likely to help keep global inflation in check. Crude oil prices fell immediately after the decision on expectations of increased output, especially in the United States. With oil prices already down year-on-year, they should have a negative impact on inflation. Another reason, perhaps, why central banks will be in no hurry to tighten monetary policy.

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4. Chinese puzzle

A plethora of data is due from China over the coming days, with markets keen to dissect the data from the world’s second-largest economy to determine the state of its health. In the first quarter, China’s economy grew faster than expected thanks to higher government infrastructure spending and a gravity-defying property boom lifting industrial output by the most in over two years. But analysts thought the spurt in China’s economic growth seen at the start of the year might be as good as it gets as policy makers seek to rein in speculative investment, especially in the property sector. Trade data for May as well as the latest foreign exchange reserve numbers are due out on Thursday, followed by inflation data on Friday.

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5. How much longer?