Sterling bounced back to its highest level in a week last night and had its most dramatic one day jump in six years after it became apparent that there would not be long drawn out negotiations on the formation of the next UK government.
Peter O'Flanagan, Head of Trading with Clear Treasury, said the exit polls showing a Conservative victory certainly helped the British pound going into markets this morning. "Historically the pound rallies on a Tory win. The fact that there won't be horse trading over the formation of the next government should help," he said. "There are a few concerns on the horizon, however, such as the rise of dominance of the SNP. That may result in another Scottish independence referendum in the medium term. And there's the increased chance of an EU referendum which could cause concerns for the pound," he added.
Mr O'Flanagan said the impact of the expected EU 'in-out' referendum wouldn't be immediate. "In the short term, it's unlikely to have an impact. It is likely to happen because David Cameron has signalled it, but it's a matter now of when it comes to fruition."
He said there had been quite a bit of volatility in the pound in recent days and weeks but that the performance of sterling had not been too badly affected by the expectation of long drawn out government negotiations. "It has been helped by weakness in other currencies, particularly the US dollar, which saw the sterling-dollar rise to two and a half month highs. The pound was under pressure from the euro a bit, but that had more to do with underlying euro strength."
Peter O'Flanagan also dismissed suggestions of the ECB unwinding QE early, as a consequence of that euro strength, as premature. "The surge in euro has been to do with some unwinding of the bond position. This is just a rebalancing. We're only a few months into QE. Where we have seen signs of things bottoming out, it has been from a low ebb. We have to see further evidence of a recovering economy," he concluded.
MORNING BRIEFS - European bond prices have dropped dramatically in recent days as markets anticipate a return of inflation to the euro zone. Bond yields - the rate of return that investors receive for their money - were at their highest level in a year across the euro zone yesterday. Irish Government borrowing prices were under particular pressure with the cost of 10 year debt moving close to 1.5% at one point yesterday - a doubling of the borrowing cost just over a week ago. It later settled down at 1.25%. However, bond yields have been at record low levels in recent times thanks to the ECB's quantitative easing.
*** China's trade data for the month of April looked fairly bleak. Imports fell by a worse-than-expected 16.2% from a year earlier, and exports sank by 6.4%, much lower than the expected increase of at least 1.5%. The data will add pressure on the central bank to expand its stimulus measures as evidence mounts that the economic slowdown is continuing in the world's second biggest economy.
*** A few merger attempts have been on the cards in the past 24 hours. The world's biggest seed company, Monsanto, put in a bid for the Switzerland-based crop chemical company, Syngenta, valuing it at $45 billion, a 35% premium to its share price.
Syngenta declined but has left the door open to a higher Monsanto bid. Meanwhile, taxi app, Uber, made a bid for Nokia's map software unit, Here. The New York Times reports that the bid price was as high as $3 billion. An acquisition could help Uber end its dependency on Google Maps but there are potential rivals lurking to buy the unit.