Tom Elliott, deVere Group’s International Investment Strategist, warns that global markets could suffer severe volatility in the wake of this week's U.K. election.
Elliott predicted four different scenarios in the wake of Thursday's vote:
- The British pound will come under intense pressure,
- U.K.-focused stocks will weaken,
- gilt prices will rise.
- capital markets will experience significant volatility.
His four scenarios come as the gap between the Conservatives and Labour, the two major parties, has continued to narrow in recent days. The latest poll from YouGov has the Conservative lead at just four points over Labour, while ICM has it standing at 11 points.
“I believe that there’s a 55 percent chance that the Conservatives will have a majority of below 60," Elliott said.
"Should this happen, sterling would wobble, and would fall sharply if that majority is below 40 and Theresa May is again beholden to the hard Brexit lobby of Tory MPs. FTSE 100 would rally as sterling falls," he said.
U.K.-focused stocks weaken and gilt prices would rise (and yields fall) in anticipation of a weaker economy.
"Anything below 25 and May's job would be on the line, with a leadership contest beckoning. Sterling would then fall further as the risk of a hard Brexit PM, such as David Davis, is priced in. Capital markets would become very volatile,” he said.
deVere Group’s International Investment Strategist concludes: “There are a few certainties in this election, but one thing we almost know for sure is that turbulence in financial markets is likely to intensify in the short-term as Britain readjusts.”
To be sure, U.S. stocks were slightly lower in early afternoon trading on Tuesday as investors shunned riskier assets ahead of what is expected to be a busy Thursday, when Britain goes to the polls and former FBI director James Comey testifies before Congress.
Comey, who was investigating a possible collusion between Donald Trump's presidential campaign and Russia to sway the 2016 U.S. election, was fired in May, Reuters reported.
His testimony could dampen already flagging momentum for Trump's legislative agenda of rolling back healthcare reforms and overhauling the tax code.
Investors will also watch out for the European Central Bank's meeting,as policymakers are expected to take a more benign view of the economy, according to sources.
"We have a relatively light week in terms of economic data and investors are awaiting Thursday's events," said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.
"The market's reaction to Comey's testimony would depend on if he says something new that nobody knows about, although, a lot of what he might be asked could be classified information."
(Newsmax wire services contributed to this report).
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