Last week’s Conservative party victory in the UK parliamentary elections was decisive and both stocks and the currency rose on the news. This was not so much a celebration of a Conservative win, more relief that the opposition Labour party was crushed – it is currently run by unreconstructed communists. The result comes as no surprise, as the last time this usually centre-left party was previously hijacked by Marxists was in the 1980s when they also suffered a similar defeat. The relief came from a real fear that this time the issue of Brexit might muddy the water enough to allow these dangerous ideologues to slip past the winning post and form a government. They didn’t but there is a lingering worry for the next time due to the large numbers of young ‘woke’ people who became attracted to this re-cycled Bolshevist nonsense. A powerful clique of believers also established itself around the leader, who looks cuddly but is full of hate, as is often true of gurus at the head of cults. Lenin proclaimed that his cause was driven by hatred after all. They are all still there, even if the leader steps down.
The tendency in recent years has been for the UK currency and the stock market to move in opposing directions, as Brexit has dominated all other influences. Every time the £ dipped, it thereby made the (considerable) non-UK earnings of big UK companies cheaper to buy. This caused the FTSE to rise a bit and so this alternating pattern developed while Brexit wrangling continued, endlessly.
There is more to life than leaving the EU of course and one benefit of the prolonged leaving process is that people have had time to contemplate what happens next. This is one of those rare moments when government policy will make a real difference and the signs are good. The new Conservative government led by Boris Johnson has made free-trading from a good competitive position its priority and we expect that this will lead to a boom. The UK is well positioned for one and we expect a sharp increase in prosperity over the years to come.
We have long argued that dips in the FTSE should be bought for a ‘long-term hold’ and here we update that analysis. Firstly, a long-term comparison of the main UK FTSE index and the EU equivalent, the Eurostoxx. The FTSE has rallied more than the Eurostoxx from its post-crash low having suffered less on the drop. Since the ‘referendum low’ in 2016 the Eurostoxx has outpaced the FTSE by 43% vs 30%. This makes the FTSE ‘cheap’ compared to its European cousins and so we repeat our long-held view now – buy the FTSE:
In the nearer-term, the FTSE has just pushed up above weekly-scale compressions, as shown in the first chart below. So has Spain, by the way, so this is not just a UK election rally – Spain is in the second chart. These weekly-scale compression breaks are too fresh to rely upon, as the week is not yet finished but the UK stock market as a whole is also breaking above daily-scale compressions, as shown in the last chart below. Unless there is a sharp reversal today, buy more.
The same argument does not apply to the £. This has been rising for a while and there are now weekly-scale extensions in several £ pairs. The next chart shows the Euro-£ as an example. There is a long way to go before the UK negotiates a separation from the EU and so we expect continued currency volatility.
Lastly, we have been recommending buying commodities, one by one as signals develop and the most recent one comes in Corn, which has just broken up from a daily scale compression. Buy that.
