UK election: a sideshow for credit

09/06/2017

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Normally a hung parliament might be expected to deliver drama and while the surprise outcome in the UK parliamentary elections is making itself felt in the currency markets through a slide in sterling, the reaction in credit markets is, quite frankly, muted. Although credit spreads in UK banks have widened a couple of basis points in early morning trading, this is barely distinguishable from ordinary daily movement. In fact, many areas of the credit market have improved on the day.
 
From a credit perspective it is hard to decipher what a hung parliament might mean. A weakened hand for the UK prime minister adds to political uncertainty but potentially offers a more measured approach to Brexit negotiations, which would be welcomed by many industries. 
 
Coming fast on the European Central Bank (ECB) decision and the presidential drama in the US, there was a danger the UK election would be overshadowed and it is clear that presidents Draghi and Trump have had more bearing on credit markets than prime minister May. The confirmation by the ECB to maintain quantitative easing (asset purchases) of €60billion a month until year end is supportive for credit although the shift in language suggests the easing bias is dissipating. In the US, moves to repeal parts of the Dodd-Frank act spell a possible return to greater volatility in financial credits, albeit incrementally positive for earnings.
 
In a week of political drama it is also worth underscoring the importance of idiosyncratic factors. Subordinated bondholders in Banco Popular in Spain have had little to cheer about as their capital was absorbed in a rescue deal. Conversely, collective action by bond investors helped overturn aggressive clauses in a euro bond issue by US company Superior Industries, creating better terms for investors. If the UK election tells us anything it is that there is a lot going on beneath the surface, whether in politics or capital markets.

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