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Thursday preview: UK votes as market eyes Comey drama and dovish Draghi

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Thursday preview: UK votes as market eyes Comey drama and dovish Draghi

Wed, 07 June 2017
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(ShareCast News) - After several days of calm before the storm, analysts and traders are looking forward to what they've dubbed Super Thursday, as a confluence of political and economic events is likely to lead to a big spike in volatility.
At home the main event is the general election, which will see maybe one or two opinion polls early doors but little news until the exit poll late in the evening, while in the interim the European Central Bank will make their rate announcement for June and then Stateside what one newswire called the "most anticipated pieces of political theater since Watergate" as ex FBI boss James Comey's testimony before the Committee in open session in the morning will be closely followed for possible impact on Donald Trump's ongoing presidency.

UK company watchers have such titbits as Auto Trader's annual results and a first quarter update from Asos rival Boohoo.com.

ITS ELECTION TIME IN 2017 AGAIN

Polling stations will open at 0700 BST and close at 2200 BST when pollster Ipsos Mori will then publish the official exit poll commissioned by the BBC, ITV, and Sky, which will give a projection of the ultimate number of seats won by each party.

The exit poll has been very accurate at the last three elections, but if it confirms a close-run race, we will need to wait until 0400 BST on Friday before half the constituency results are delivered and 0600 BST when around 90% of the returning officers will have spoken.

Recent polls ahead of the general election show the Conservative party's lead over Labour is now down to seven points from as high as 20 points only a couple of weeks ago, while a number of polls are calculating a lead of just a one and YouGov even suggesting Theresa May might actually lose seats and fail to win a majority at all.

Although opinion poll averages have the Tories slightly increasing their current slim majority the tightening of polls and wide range between different pollsters increases the likelihood of a shock result.

As for the impact on financial markets, Citigroup sees little impact from a Tory victory with a reasonable majority, eg around 40 seats.

"But, other outcomes carry more risk due to implications for GBP, Brexit, nationalisation, banks and corporate tax," it said, adding that the pound is likely to be sharply lower in a Labour-led government. "The Brexit path is less clear in anything but a reasonable Conservative majority. Nationalisation, headwinds for banks and higher corporate taxes = equity negative and are on the menu for a Labour-led government."

Analyst Joshua Mahony at IG noted a continued flood of cash into havens such as gold and the yen due to uncertainty caused by the recent gains in the polls by Labour.

However, with the spread betting group's political markets showing an 80% expectation of a Conservative majority, he said "it is clear that not everyone believes it is as close as the pollsters would have you believe".

Looking at the pound, Rabobank expressed the difficulty of squeezing the current complexities of UK politics into a binary universe, but suggested the behaviour of the pound this year indicated "a relief rally would likely follow a strong victory for May tomorrow, while it could fall on any other outcome".

"Regardless of the election outcome, we continue to expect that Brexit related uncertainty will weigh on the pound again in the coming months. Given that the Brexit negotiations are due to start on June 19 and that these are likely to be tough, we expect EUR/GBP to edge towards the 0.89/0.90 area by year end."

THE DRAGHI AND COMEY SHOWS

Traders have at least one of their six screens switched over to the TV on Thursday to watch ECB president Mario Draghi and ex FBI chief James Comey talk.

For currency traders, the outcome of the ECB meeting and Draghi's press conference represent a major event risk for the euro.

Although it is widely expected that the central bank will leave monetary policy unchanged in June, investors will be paying very close attention to see if there are any hints of the ECB tapering in the future, said analysts at FXTM.

"With confidence steadily rising over the health of the European economy amid the improving fundamentals, it will be interesting to see if the ECB dishes out a hawkish surprise."

While continuing US dollar weakness was helping boost the euro, earlier in the week, this reversed a day ahead of the meeting, with investors worried about the prospect of Draghi easing off on the dovish rhetoric.

Indeed, analyst Craig Erlam at Oanda noted that the euro dropped on Wednesday morning after reports of a draft ECB staff projection which showed growth forecasts being revised higher and inflation lower through 2019.

"Should this be the case, it would support the need for monetary policy to remain very accommodative and either delay tapering or at least slow the pace of it," Erlam said.

"The dovish nature of this has hit the euro sending it back towards 1.12 against the dollar and below 0.87 against the pound. Should this be rejected, I would expect the moves to quickly reverse."

On Thursday morning Washington is going to come to a standstill as US TV networks interrupt their regular schedule to broadcast former FBI director Comey's first public testimony since President Trump fired him last month.

Comey is expected to tell the Senate intelligence committee that Trump asked for his loyalty and for him to end the FBI's probe into ties between former White House national security adviser Michael Flynn and Russia.

Lawyers told Reuters Comey would seek to avoid compromising FBI special counsel Robert Mueller's new inquiry or separate congressional investigations, though CBS said it had been told by a source familiar with the matter that Comey had been given the go-ahead to speak before Congress about his conversations after speaking with Mueller.

AUTO TRADER AND BOOHOO REPORT

Auto Trader's management has guided for low double-digit average revenue per retailer growth for 2017, saying at the time of interim results that investors should expect an acceleration of stock in the second half driven by previous growth in the new car market.

Consensus forecasts are for revenue at £310m, adjusted operating profits of £212m and earnings per share of 15.2p.

Morgan Stanley forecast revenues of £312m, EBITDA of £215m and earnings per share 15.6p, expecting the strongest growth to come from display and trade, while consumer services could be weaker than in the first half.

The focus is expected to be on the outlook for 2018.

"Auto Trader has begun monetising part exchange on a subscription basis and new cars on a per lead basis for the first time this fiscal year. At the last set of results, management said that pricing increase in FY18 could be similar to 2017."

In its recent final results, Boohoo management guided to group revenue growth of close to 50% this year, with core Boohoo growth of around 25% and group EBITDA margins of 10%.

Barclays forecast Q1 revenues will have grown by around a third to almost £78m.

"Given recent online clothing data from BDO and market commentary from ASOS, we expect UK growth to be somewhat lower. But we expect growth in other regions to have remained very strong," the bank's analysts said.