EU equities firm on eve of UK election

European stocks ticked higher yesterday on the eve of a hectic news day that includes a general election in Britain, an interest rate call in the eurozone and vital testimony from sacked FBI chief James Comey in the United States. “There’s a lot of stuff that people are watching,” said William Hamlyn, investment analyst at Manulife Asset Management, noting UK investors will “mainly focus” on the snap election.

In late morning deals, London equities won 0.2 percent, Frankfurt added 0.4 percent and Paris gained 0.9 percent. Today also sees the European Central Bank’s policy meeting and-in what could potentially be the biggest market-mover-sacked FBI boss James Comey’s testimony on President Donald Trump’s campaign links to Russia. Meanwhile, Britain headed yesterday into the final day of campaigning for a general election darkened by jihadist attacks in both London and Manchester.

Conservative victory?

Opinion polls predict a win for Conservative Prime Minister Theresa May, but main opposition Labour leader Jeremy Corbyn has gained ground in recent weeks. Financial markets expect May to triumph against Corbyn, even though the Conservatives’ polling lead has narrowed since the start of the campaign.

“I think the markets are definitely pricing in a Conservative win,” Hamlyn told AFP. “If you looked at the polls, you would basically say that markets are being incredibly complacent about the outcome. “They are certainly not pricing in the odds of a Labour election victory. The polls are split between those that think there is going to be a big Conservative majority, and those that think it is too close to call.” He noted that there was a growing mistrust of opinion polls after they failed to forecast the Brexit referendum last year, the Conservatives’ solid victory in May 2015, and Trump’s presidential election win last November. Meanwhile yesterday, Asian stocks trod water as they nervously awaited the string of major events that could either hammer global markets or fuel a rally.

Nerves over Comey

“There seems to be a little bit of nervousness in the market over Comey’s testimony,” added Greg McKenna, chief market strategist at AxiTrader. “Whether it is geopolitics and the Middle East, worries about James Comey’s testimony, the ECB or UK election, traders backed off a little.” Adding to the sense of unease is a brewing crisis in the Middle East, where Saudi Arabia, the United Arab Emirates and Egypt cut off ties and transport links to Qatar, citing its alleged support for extremism.

There are fears the dispute could turn into a wider conflict involving Qatar ally Iran, with Trump wading into the row in a series of tweets signaling support for Riyadh on the issue. After a recent rally trading floors have quietened as dealers take a wait-and-see attitude, lifting safehaven assets such as the yen and gold.

China’s reserves rise

Elsewhere, China’s foreign currency reserves rose in May for a fourth month ahead of a possible US interest rate hike that might put new pressure on Beijing’s exchange rate controls. The reserves, the world’s biggest, increased $24 billion to $3.05 trillion, according to government data released yesterday.

A sharp decline last year prompted Beijing to tighten controls on the outflow of money from the world’s second-largest economy. The Chinese controls could face a new test if the U.S. Federal Reserve decides at a meeting next week to raise interest rates. That would draw money out of China in search of higher returns, which could require Beijing to raise its own interest rates or further tighten controls. The Fed has signaled it expects to raise rates a total of three times this year to ensure tighter labor markets do not trigger inflation pressures. The central bank spent reserves to shore up the yuan’s exchange rate after expectations that the Chinese currency would decline prompted investors to move money out of the country starting in 2015. The reserves declined from a peak of $3.99 trillion in June 2014 to just under $3 trillion late last year. Late last year, the net outflow was tens of billions of dollars a month, which prompted Beijing to step up scrutiny of proposed foreign investments and ban some activities by individual investors.

“Though the large capital outflow appears to have eased notably, the authorities have no intention to loosen capital control yet,” said Citigroup economists Li-Gang Liu and Xiaowen Jin in a report. In its latest tactic, the foreign currency regulator announced Friday that Chinese banks must report all overseas automatic teller or credit card transactions above 1,000 yuan ($150) by their customers beginning Sept 1. The tighter controls have temporarily set back Beijing’s gradual moves to encourage more use of the yuan abroad for trade.

The People’s Bank of China bases the yuan’s state-set exchange rate on a basket of currencies that is believed to be dominated by the dollar. That required Beijing to intervene to keep the yuan in line with the dollar as the greenback rose over the past two years. The latest controls appear to have locked the yuan to the dollar, possibly to send a clear signal it won’t fall further.