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 Sterling leapt 1.3 percent against the dollar and London's FTSE
led equity markets with a 1.9 percent jump to help European shares
rebound from two-month lows and wipe out what had looked like being
a second week of losses.
With almost all the seats counted in the UK, the Conservatives were
set to govern for another five years, quashing pre-election fears
that the result might be too close for any party to form a stable
government.
Traders and investors breathed a collective sigh of relief, putting
aside for now concerns about a planned referendum that could lead to
Britain leaving the European Union and focusing instead on hopes
that the country will remain one of the fastest growing Western
economies.
"The moves in sterling overnight to the $1.54 level, and the
follow-through in the stock and gilt markets, have produced a sigh
of relief that the threat of a dysfunctional government has
dissipated," said Matthew Beesley, head of global equities at
Henderson’s.
"This result is better than financial markets, or indeed betting
markets, dared to believe. It answers many questions. But it asks
quite a few too."
Confidence was also given a big lift by Europe's bond markets as
they stabilized after one of their most turbulent weeks in decades.
Government bond yields from Germany to Greece dropped back in
morning trading, though the recent pounding - triggered by signs of
a resurgence in inflation and a rebellion against negative yields -
kept normally rock-solid German Bunds on edge. [EUR/GVD]
The bond stabilization also helped investors cast off their normal
caution ahead of monthly U.S. non-farm payroll jobs data and its
implications for when the Federal Reserve raises interest rates.
Economists polled by Reuters expect the figures to show a jump of
224,000 new jobs in April after a puny 126,000 in March and a run of
generally disappointing U.S. data since then.
"The U.S. economy had virtually a zero growth in January-March. If
it remains weak after April, a rate hike by the Federal Reserve may
be delayed further," said Shuji Shirota, head of macro economics
strategy at HSBC Securities in Tokyo.
PAYROLLS
The dollar inched up in currency markets ahead of the data but it
was completely in the shadow of sterling following the election
outcome.
As well as its gains against the dollar, the UK currency jumped 1.7
percent against both the euro and yen to notch its biggest
trade-weighted rise since 2010.
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"Viewed within the context of the UK's large current account
deficit, the policy uncertainty removed by today's result will be a
relief for some previously nervous foreign investors," said Adam
Myers, European head of FX strategy at Credit Agricole.
Futures markets pointed to Wall Street's main markets opening around
0.2 percent higher although much is likely to hang on what the
payrolls data, due at 1230 GMT (8.30 a.m. EDT), signals.
Having slumped to a seven-year low last month, signs of a pick-up
this time around could keep the Federal Reserve on track to hike
interest rates this year, something markets have began to doubt
recently.
The mood in Asia overnight had also been brighter with MSCI's
broadest index of Asia-Pacific shares outside Japan ending up 0.5
percent as it recovered from a one-month low.
Tokyo also closed up 0.5 percent, but China's mainland stock index
saw the biggest move as it jumped 2 percent to claw this week's
losses back to 4 percent. The gains came despite Chinese exports
sharply missing forecasts with surprise 6.4 contraction in April.
The calming of bond jitters had been helped by an overnight fall in
oil prices: A steady rise in oil prices since March had been cited
as one reason behind the rout in bonds as higher oil prices tend to
boost inflation - a major risk for fixed-income investors.
At midday in Europe, Brent was heading for its first weekly drop in
five weeks, hovering at $65.88 per barrel after hitting a five-month
high of $69.63 on Wednesday.
Gold was on track for its first rise in five weeks at $1,185 an
ounce.
(Additional reporting by Anirban Nag in London; Editing by Jeremy
Gaunt and Gareth Jones)
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