Treasurys Edge Lower with Fading Geopolitical Risks While Tech Stocks Plunge

The reaction in US financial markets to yesterday’s trio of political/market risks has been largely muted for now.  All three major US stock indices have vacillated, with the S&P 500 rising to a new record high early in the session before giving back a portion of its gains.  The tech-heavy Nasdaq briefly traded higher before falling more than 2.25%, weighed down by Apple (-4.5%), Facebook (-3.75%) and Google (-3.75%).  Treasurys have maintained a modest selloff, with yields/swap rates up 1-2 bps across the curve as the yield on the 10-year note rose 2 bps to 2.20%.  The US dollar jumped almost 0.5% against major currencies, bouncing off the seven-month low levels experienced earlier this week which stemmed from the uncertainty ahead of yesterday’s events.  Investors can now turn their focus to next week’s FOMC meeting, and while fed fund futures are currently pricing the probability of a rate hike at nearly 100%, the commentary from Fed Chair Janet Yellen afterwards has the potential to generate considerable market volatility.  Of particular interest will be the Fed’s views towards the recent weak economic data that has been received over the past month and its potential to impact the rate hike expectations of the committee.  

In the UK, the sterling declined as much as 2.6% following yesterday’s election which saw British Prime Minister Theresa May’s Conservative party lose parliamentary majority.  Back in April, Theresa May called for the snap election with the expectation of strengthening her hand in the upcoming Brexit negotiations, however similar to last year’s situation where David Cameron put the nation’s European Union membership up for vote, preliminary polls proved incorrect.  PM May’s Tories held a 330-seat majority heading into the election, but finished with just 318 seats, below the 326-seat majority threshold.  May has since declined calls for her resignation and has moved on to gain support of the Democratic Unionist Party, a 10-seat Northern Ireland party, which when combined with her existing seats, would provide the majority needed.  From the perspective of financial markets, a hung parliament would represent the worst-case scenario, as it would provide the least amount of clarity in determining the outcome of the Brexit negotiations which are supposed to begin in 11 days.  British stocks gained 0.7% on the day, led by exporting companies whose shares benefitted from the devaluing of the sterling.