Markets Live: UK cliffhanger sparks wobbles

And we also get Chinese inflation data: consumer inflation in May picked up to 1.5 per cent from a year earlier, in line with market expectations.

The consumer price index (CPI) had been expected to rise 1.5 per cent year-on-year, compared with April's 1.2 per cent gain.

The producer price index rose 5.5 per cent in May from a year earlier, cooling for the third consecutive month.

In April, factory gate prices rose 6.4 per cent from a year ago, slowing from the previous month, driven by persistent declines in iron ore and coal prices amid concerns over cooling demand.

Analysts had predicted May producer price inflation would be at 5.7 per cent on an annual basis.

Regulatory efforts to contain financial leverage may weigh on property and
infrastructure investment in the second half, denting a crucial pillar for raw material demand.

Weaker factory prices "are consistent with slower investment growth," China International Capital economists wrote in a note. "The soft patch may have resulted from the disinflationary impact from liquidity tightening."

In today's economic data, the number of home loan approvals has fallen 1.9 per cent in April, missing market expectations for a fall of 1.0 per cent.

The value of total housing finance fell 1.6 per cent to $32.4 billion in the month, seasonally adjusted. The value of loans approved for owner-occupied housing fell 1.1 per cent in April, while the value of loans for investment housing declined 2.3 per cent.

Investors accounted for 47.6 per cent of new lending activity in April; first home buyers accounted for almost 9 per cent #auspol #property pic.twitter.com/h5UDY7SzFZ

— Callam Pickering (@CallamPickering) June 9, 2017

The local sharemarket is now trading slightly higher, shaking off the early losses thanks to some buying in miners and banks.

Most other regional markets have opened higher, showing that the damage caused by the shock UK exit polls has been largely limited to the pound, so far.

Japan's Nikkei is up 0.7 per cent, rising back above 20,000, Korea's Kospi has gained 0.7 per cent and the Hang Seng in Hong Kong is flat.

The pound shed almost 3 US cents in hectic trade, or close to 2 per cent, while futures for the FTSE lost 0.5 per cent on speculation the left-leaning Labour Party might actually be able to form a coalition government.

The rot started when an exit poll showed Prime Minister Theresa May's Conservative Party could fail to win a clear majority, a shock result that would plunge domestic politics into turmoil and delay Brexit talks.

Early results have been mixed leaving the outcome very much in doubt, with the BBC reporting that 76 seats appeared too close to call. 

"It's clear that the election is a humiliation for the Tories, who blew a massive poll lead in just a few weeks," said Westpac senior currency analyst Sean Callow.

He predicted a hung parliament would strip the pound of all the gains made since the election was called and leave it wallowing around $US1.2500.

"But given the patchy history of exit polls, this time we will have to wait for the seat by seat results, setting the pound up for a volatile day," he added.

While the local market is busily clawing back most of the early losses, it's quite likely both UK stocks and the pound face more volatility today and over the next days. 

Here's Allianz chief economic adviser Mohamed El-Erian in the FT:

It must have seemed such an obvious bet for Theresa May, and it is one that markets bought into readily as they pushed sterling stronger and fuelled a broad-based stock market rally. But, if the exit polls prove accurate, they may now all have to scramble to adjust to a more uncertain outcome for politics, economics and markets.

Judging from the exit poll, it is a gamble that has gone wrong for Mrs May and her party. The prime minister could well lose her post. And while the Tories will remain the largest party in the Commons, it is likely to lose its ruling majority according to the exit poll. This opens the possibility of various coalition groupings, including some (lower probability) ones that could even exclude the Tories from government.

BBC have updated exit poll based on results so far, now Conservative 322 Labour 261

— Antony Green (@AntonyGreenABC) June 9, 2017

It will take some time to figure out not just how Britain will be governed and how long it will be before another election has to be called. Inevitably, this will cast a large cloud of uncertainty over the economic outlook overall and, specifically, the tricky set of negotiations that Britain must engage in now that it has triggered the process of its exit from the EU.

The election outcome also has implications for other economic influences. It will probably delay the implementation of structural reforms and could well favour the relaxation of fiscal austerity. Both, in turn, would complicate the policy challenges facing the Bank of England.

All this speaks to a weaker currency in the short term, greater financial volatility and the potential for renewed large stock market divergences between outwardly-oriented UK companies and their inwardly-oriented peers.

Over the longer-term, much will depend on how the Brexit process evolves.

Heres more at the FT ($)

Wow, the pound has just slipped below $US1.27 - that's 2.5 cents below where it was ahead of the first exit poll - on news that both Betfair and Paddy Power are now tipping Jeremy Corbyn to be the next UK prime minister.

Jeremy Corbyn is now the 10/11 FAVOURITE to be the next Prime Minister!

Full betting: https://t.co/NDuQBb3m2Y pic.twitter.com/TNhSNjUHe7

— Paddy Power (@paddypower) June 9, 2017

Political uncertainty has made a surprise return - UK exit polls have injected some volatility into global markets and the local sharemarket isn't immune.

The ASX has slipped 0.4 per cent to 5654.9, putting it on track for a 2.3 per cent weekly loss - which would be its worst weekly performance since late October.

Selling is across the board, with energy leading the losses following another slide in oil prices overnight.

Woodside has slid 1.8 per ent and Oil Search is down 1.9 per cent.

The big banks are all down around 0.6 per cent, Telstra has dropped another 1 per cent, following yesterday's slide, while the big miners are holding better, with BHP down 0.1 per cent and Rio rising 0.3 per cent.

Here are a few reactions to the UK exit polls by financial market analysts, compiled by Reuters:

Dean Turner, UBS Wealth Management:

Should the poll prove accurate, it is likely that the pound will give up the bulk of its post-election announcement gains. After this, retreating back to the low 1.20 levels versus the US dollar is a very real possibility. Nevertheless, sterling has steadied following the initial sell-off and 

Ason Ware, Albion Finanicial:

If there are any changes to Brexit it's probably a more globalised, softer Brexit which could be positive if anything. The biggest concern for markets last year when we went through Brexit was this could be the beginning of the end of the cooperation of the European Union and eurozone ... and that the UK could go into recession. But if we get more of a softer Brexit or more of a globalist stance from the UK...​its good for Europe, the UK and US assets."

Stephen Simons, FXDD Global:

It is vital to realise that this move happened at 5 pm NY time after US markets closed. This is an extremely illiquid time. And while one can understand why GBP would be lower on the Tories' lack of a majority, this move seems extreme. Certainly, electronic stop losses were triggered along the way to further exaggerate the move. Much lies ahead for England with the negotiations coming up and the recent terror attacks continue to be an ongoing issue. There are few signs that anxiety has spread into other markets just yet.

Samuel Tombs, Pantheon Macroeconomics:

This exit poll is a thunderbolt that leaves only two outcomes realistically in play: a slender Tory majority or a hung parliament. The exit poll's biggest error in the last two decades was in 2015 when it under-predicted the Conservatives' seats by 14. We see the risks to the seat projection as evenly balanced, given that its estimate was slightly too high in the four previous elections.

Craig Erlan, OANDA:

A hung parliament is the worst outcome from a markets perspective as it creates another layer of uncertainty ahead of the Brexit negotiations and chips away at what is already a short timeline to secure a deal for Britain.

Paul Hollingsworth, Capital Economics:

The economy looks set to face a period of uncertainty about the outlook for policy, Brexit and the possibility of another election. Admittedly, the exit poll could yet be proved wrong.

In local corporate news, Suncorp is raising variable interest rates on investor home loans by 0.12 percentage points, a move it says is needed to comply with the banking regulator's restrictions on mortgage credit.

The Queensland lender is also pushing up some fixed interest rates for property investors by 0.12 percentage points, and cutting two and three-year fixed rates for owner-occupiers by 0.1 percentage points.

The change means its standard variable rate for investor loans rises to 5.99 per cent.

Unlike some banks it does not charge a separate rate for interest-only loans, which are most popular with property investors, and are being targeted in a crackdown led by the financial regulator.

Banking and wealth chief executive David Carter said the bank was complying with the Australian Prudential Regulation Authority's restrictions, but it needed to act after other banks have raised rates for investors in recent months.

The last time Suncorp raised variable interest rates was in January, before APRA's latest curbs on interest-only lending were announced.

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IG strategist Chris Weston gives his take on the overnight moves:

The market has come alive with the smell of volatility as the first exit polls roll in with the Conservative party getting 314 seats in the exit polls, 12 short of the required 326 seats. Former UK finance minster George Osborne has labelled this poll "completely catastrophic" and we are one step closer to Theresa May losing an unlosable election and perhaps stepping down as her campaign has been terrible.

We wait to see if the exit polls are indeed accurate as they were in 2015. All eyes on the key marginal swing seats like Chester and Ealing, while bellwether seats include Nuneaton, Thurrock and Dartford.

In terms of causing gyrations, the same can't be said for the European Central Bank, and while the wash-up is we have seen the EUR fall against all G10 currencies (well up until the UK exit polls), notably the NZD, perhaps the dovish development was cutting its inflation forecasts for 2018 30 basis points (bp) to 1.3%.

Most of the attention was placed on the removal of an explicit easing bias from the statement, but the lack of any real moves in European government bonds or interest rate markets suggest the market was clearly not debating any further monetary easing in any shape.

There has been a sizeable focus on former FBI Director Comey's testimony, but again for those looking for a smoking gun that detailed Trump obstructed justice, they didn't hear it in the testimony and as expected it want a market moving event. Perhaps the bigger story for markets was the headlines that House Speaker Paul Ryan has the votes to pass a bill to repeal parts of Dodd-Frank and impose sizeable changes to the US financial regulatory system.

Read more.

And here's the overnight action by numbers:

• SPI futures up 5 points to 5680
• AUD down a touch to US75.3c
• On Wall St, Dow and S&P500 flattish, Nasdaq up 0.4%
• In New York, BHP up 2%, Rio up 2.1%
• In Europe, Stoxx 50 up 0.4%, FTSE100 down 0.4%, CAC flat, DAX up 0.3%
• Iron ore flat at $US55.36/tonne
• Spot gold down 0.6% at $US1,279.07. 
• Brent crude down 0.3% at $US47.92
• 10-year bond yield: US 2.19%, Germany 0.26%, Australia 2.40%

On the economic data agenda:

• April home lending data from the ABS at 11:30am AEST
• Chinese consumer and producer inflation prices, also at 11:30am
• Canadian unemployment rate tonight

Stocks to watch:

• BHP upgraded to but at UBS
• Auckland Airport raised to equalweight at Morgan Stanley
• Fortescue cut to underperform at Jefferies
• South32 cut to hold at Jefferies
• Santos raised to outperform at Credit Suisse
• Vocus raised to hold at Shaw

And now on to the last of the major news, which was former FBI director James Comey's testimony in Washington.

Comey called the Trump administration's shifting explanations for firing him "lies, plain and simple" and said he wrote detailed memos of his conversations with President Donald Trump because he feared the president would paint a false picture of their encounters.

In a different, more innocent age Comey calling the US president a liar would have been absolutely blockbuster news, but investors largely shrugged it off, relieved there was nothing substantially new in there.

"He did, though, leave just enough to continue the cacophony that has surrounded the President," NAB's Tapas Strickland noted.

For now, markets "appear to be taking a relatively watchful stance," ANZ economist Giulia Specchia said.

"From a political point of view, there are no doubt some 'zingers' in there, but whether that actually translates into any implications for Trump's policy agenda remains to be seen.

"In fact, one could argue that with 10-year [US] bond yields now back at ~2.2%, the 'Trump trade' has already been fully unwound (or close to it), and so further delays in any fiscal package should not really have an impact. Whether the same can be said for equities though (which have not pulled back at all) is a different question."

Wall St managed to eke out gains, with tech stocks again doing well.

You can read the whole story here.

Analysts in the UK have been talking to the Financial Times in the wake of the sharp drop in the pound this morning. Here's what's on their minds:

"The market will be praying that this exit poll has got it wrong," said Lee Hardman, currency analyst at MUFG. "Currency volatility is the best proxy for market fears; if the Conservative ship is sinking then the market will be looking for a lifeboat."

"The night is young but clearly markets were not positioned for this and for now the result is not seen in a positive light because it just means more uncertainty," said Geoffrey Yu, head of UK Investment Office at UBS Wealth Management.

Jeremy Cook, chief economist at payments provider World First, said: "Back in 2010, sterling reacted negatively to an exit poll that showed a hung parliament and it is doing the same again this evening. We believe eventual confirmation of a hung parliament could prompt as much as a 2-4 per cent decline in the pound across the board."

He added: "Sterling slipped by 2 per cent following the 2010 announcement of a hung parliament and we would expect a reaction tonight to be amplified by Brexit concerns and limited expectation that a lasting coalition could be formed. Sterling is once again being undermined by politics"

James Knightley, senior economist at ING, said: "Some may say that at least this outcome reduces the chance of hard Brexit given a Jeremy Corbyn-led government will probably be more relaxed on the issue of controlling immigration in negotiations relative to the Conservatives.

"They also appear more concerned about getting access to the single market. As such, there appears greater opportunity for compromise that could potentially yield a 'softer' Brexit, something closer to EEA membership enjoyed by Norway."

The pound has come back a bit, recovering about a quarter of its immediate shock loss, but ING reckons it could be a volatile session for the currency.

A final result of the UK election is not expected before 2pm, maybe 3pm AEST.

Expect the pound to continue selling off if coalition uncertainty prevails, just like in 2010. #electionday2017 #fx #gbp pic.twitter.com/5PnjNDmzn9

— ING Economics (@ING_Economics) June 8, 2017

On to the next big event from "Super Thursday", which was the ECB's meeting overnight. And while president Mario Draghi flagged an end to rate cuts and talked up the health of the eurozone economy, there was little to nourish those who had been expecting a bolder hint as to the end of QE.

"The risks around the growth outlook are considered to be broadly balanced," the Draghi told reporters at a news conference after a monetary policy meeting in Tallinn, Estonia. "At the same time, the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed."

The change in the assessment of risks for the economy sets the scene for the ECB to start a discussion about the timing for the removal of the stimulus, though the tone of Draghi's appearance suggests officials aren't yet ready for such a debate. That chimes with comments in the run-up to the meeting that policy makers must be extremely cautious in communicating amid a lack of convincing inflationary pressure.

"We need to be patient," Draghi said. "We need to continue to accompany the recovery with our monetary policy."

Draghi said he didn't hear any "dissenting voice" to proposals that were put forward at the meeting and that tapering of the central bank's asset-purchase program was not discussed overnight.

He said that the ECB removed its easing bias to reflect the fact that the risk of deflation has disappeared and said policy makers were becoming "more confident" that inflation will converge toward its objective in a durable way. At the same time, he stressed the central bank needs to be persistent and help the economy achieve full recovery.

Traders were obviously expecting more, and the euro sagged a little following the announcement.

"It's still a very dovish tone - Draghi doesn't see this as preparation for a tapering scenario," Anatoli Annenkov, senior economist at Societe Generale in London. "We're still very far off from that point."

Of the trio of events overnight the biggest shock has only come around 7am this morning, AEST: British exit polls suggest a stark possibility of a hung election.

The other two major events overnight was former FBI director James Comey testifying in Washington and a European Central Bank meeting. Both were eventful, but both failed to move markets in any meaningful way.

But back to the UK, and newspaper front pages and headlines are all trumpeting that British PM Theresa May's gamble to go to the voters early looks to have been a massive miscalculation.

Sterling fell to the lowest since April after May's Conservative Party was projected to win 314 seats, short of the 326 required for a majority. Labour was projected to take 266 seats, according to an exit poll. Opinion polls suggested a tighter race in the run-up to the vote, spurring concerns of a hung parliament.

The effect on the pound has been electric, shoving it down by nearly 2 per cent in short order as the exit polls hit the wires. It's since recovered a touch to $US1.275, around 1.5 per cent lower. British bonds, or gilts, haven't traded since the end of London trade very early this morning.

NAB economist Tapas Strickland said a hung parliament, which if it occurs should be confirmed during today's Australian trading hours, opens up a number of questions for the Tories. 

"Will Theresa May be forced to resign? What will Tories have to concede to form a coalition government and will another Brexit referendum be part of the horse trading? These questions will not be answered all today, and it will likely weigh on markets for some time."

Strickland added that while still early days and the result will need to be firmed up by the official results, the Bloomberg consensus in the event of a hung parliament suggests further downside risks to sterling, with a median expectation of $US1.235 should the voting prove inconclusive.

And yes, there are live UK election blogs! You can read the SMH/The Age's one here and The AFR's one here.

Good morning and welcome to the Markets Live blog for Friday.

Your editors today are Jens Meyer and Patrick Commins.

This blog is not intended as investment advice.

Fairfax Media with wires.