UK election overshadows Comey’s testimony and ECB interest rate decision

The US stock market pulled back in a slight correction in the last week while the dollar index rebounded. US markets ended lower on Monday with more weak data undermining investor confidence after disappointing May jobs report: the ISM Non-Manufacturing index slipped to 56.9 in May from 57.5 in previous month, a 12-year high, and factory orders fell 0.2% in April. US stocks continued the slide on Tuesday as political uncertainties undermined market sentiment ahead of former Federal Bureau of Investigation director Comey’s testimony to the Senate on Thursday and UK general election the same day. US stocks indices advanced on Wednesday with gains in financial sector offsetting the drop in energy shares and the dollar inched higher in a cautious trade.

The US stock market advanced together with the US dollar index on Thursday after Comey’s testimony at Senate hearing made no allegations connecting President Trump directly to Russia. In UK election Conservatives lost their parliamentary majority. Prime Minster May started negotiations with Northern Ireland’s Democratic Unionist Party to support her government. Conservatives need the support of the Democratic Unionist Party’s 10 lawmakers to make up for the Tories’ nine-seat shortfall in the House of Commons. With Conservatives in a weaker position than before the snap election, talks with European Union leaders about terms of Britain’s exit from EU may now need to be delayed. Any delay will shorten the time that Britain has to reach a deal before it leaves the bloc in March 2019. The Pound dropped as much as 2.1% before reversing some of those losses. The European Central Bank left the policy unchanged.

The ECB dropped its guidance that rates might fall further, saying only that it now expects borrowing costs to stay at present levels for an extended period. The euro slipped 0.5%.

No significant news came out on Friday but the slide resumed. The broad US stock market ended the week 0.95% lower while the US dollar index advanced 0.6% for the week. The most significant economic events this week are the Federal Reserve’s interest rate decision on Wednesday, the Switzerland National Bank’s and Bank of England policy meetings on Thursday and Bank of Japan monetary policy meeting on Friday. Investors expect the Federal Reserve will hike rates 0.25 percentage points to 1% - 1.25% range despite lower than expected growth in May nonfarm payrolls and recent weak data. The central banks of Switzerland, England and Japan on the other hand are expected to leave the rates unchanged as the Fed further tightens. Before the central banks’ meetings the consumer prices indexes for the UK and the US will come out on Tuesday and Wednesday respectively. In our opinion the outlook is negative and both are expected to record lower gains than in April.