Market Reactions to Political Uncertainty: Oil, Yen, and UK Fiscal Policy

Political Gamble: Oil, Gold, Yen, and Bonds Decline

"You've got to know when to hold 'em, know when to fold 'em"

Oil, gold, the yen, and bonds gapped down as politics and geopolitics dealt their hands out early at the start of the week.

Japan's Political Landscape: A Headwind for the Yen

There’s something about politics, one long gamble, that is reminiscent of playing your cards well. Japan’s new prime minister, Ishiba, installed only a month ago, has not played his cards terribly well.

USDJPY leapt at the Sunday night open as Japan’s ruling LDP lost its majority in parliament for the first time since 2009, though Ishiba indicates he will stay on for now. All feels a bit Theresa May. I know nothing about Japanese politics, but it is safe to say that the uncertainty and political outlook are a little headwind for the yen – on balance, you think it ought to make it a little tougher for the BoJ to hike. But sellers are pushing on an open door with USD bid along with higher Treasury yields – the 10yr hitting a fresh 3-month high.

Israel's Strategic Moves: Oil Prices Dip

Israel is keeping its aces for now: the IDF carried out “precise and targeted” airstrikes on Iran, avoiding oil and nuclear facilities. This pushed down the risk premia of a wider escalation of the conflict, and so Brent dipped sharply. Israel, for now, is holding its cards close to its chest and choosing to hold ‘em rather than go all in. Oil’s dip pushed risk sentiment on, but the FTSE 100 was the laggard early Monday, with the oil heavyweights a bit of a drag. London rose about 0.1%, whilst Paris +1% and Frankfurt +0.5% had a bit more upside. Japanese equities rallied on the weaker yen in a broadly positive session in Asia. US futures are looking up.

UK Labour's Gamble: Borrowing to Invest

Meanwhile, the UK Labour party is gambling on the market, playing along with its plans to borrow to invest. We’ve talked a lot about this in prior posts and in our most recent episode of Overleveraged. The gamble being taken by the Chancellor, Rachel Reeves, is a considered one, taken off the back of a long campaign of persuading financial markets that Labour is trustworthy and credible. Gilt yields have ticked up a bit more, but so have US yields. The yield on the 10yr gilt is a little (about 4bps) below that of the 10yr Treasury –should this spread widen, it will be one of the surest expressions of a bond vigilante angst about the UK’s fiscal ambitions. Retail investors are said to be piling into gilts. One thing is sure – it's going to be painful. I’m not convinced that the market will give the government a thumbs up for being overly statist. Hiding behind a technical tweak to debt rules is risky – they will need to make the case for why that money is going to increase growth/productivity.

Know when to walk away: The Democrats also took a big gamble in ousting Joe Biden in favour of Kamala Harris; the odds and polls are moving against them now. Trump’s stock is literally on the up.

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