UK general election – here we go again

Theresa May has caught everyone napping, calling a snap election, but what might this mean for markets?

City of London
Source: Bloomberg

The election would mark yet another exercise of popular sovereignty, for some UK voters the fourth in three years. The polls currently suggest that the Conservatives will win out, with a potential shift of around 72 seats in their favour, while Labour is expected to lose 75, and the Lib Dems will hold their ground.

Of course, polling is not a crystal ball exercise (the key lesson of 2016), and it would make sense not to get too bullish on Tory chances, nor too bearish on Labour. The story of the election will run beyond the two big parties as well. The Lib Dems are, of the three UK-wide parties, the only one to actively oppose Brexit, and thus could be expected to pick up more than a few seats from the Conservatives and Labour, especially in metropolitan areas that voted to remain.

The manifestos will be very interesting, once they are released, and we can be sure of an intense and action-packed campaign. I would also offer a scenario in which Labour loses heavily, but perhaps not as badly as the current polling suggests, and Jeremy Corbyn stays on as leader.

The market impact has been fascinating too — sterling has raced to three-month highs, helping to drive the FTSE 100 below 7200 for the first time since early February.

The sterling move can be attributed to two things — firstly the fact that the market expects the Conservatives to win by a comfortable margin thus providing continuity of government and also greater freedom for Theresa May in her Brexit negotiations (since she will no longer be hostage to the most vehement anti-EU Tory MPs). Second, the market remains net short sterling to a remarkable degree. When some of these shorts are forced to cover, the upward move accelerates, forcing more to close their positions, and so on.

The focus now shifts to the manifestos from each party, and we can expect increased volatility in the coming days and weeks. When you thought it couldn’t get more exciting, it just has.

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