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Election 2017: how markets could react to 3 scenarios

Tory landslide, narrow victory or hung parliament? Different polls have pointed to all three. Here's how markets could respond.

 
Election 2017: how markets could react to 3 scenarios
As far-fetched as it may have seemed at the time the election was called, today’s vote has the potential to shake the markets.

While the Tories have seen their 20-point lead in the polls shrink as Labour’s campaign has gathered traction, a victory for Jeremy Corbyn’s party would still be a huge shock.

While some polls, such as yesterday’s final effort from Survation, has the Tory lead over Labour down to just a single point, an ICM poll released the same day gave the Conservatives a 12-point lead.

Taken together, the polls hand the Conservatives an average seven-point lead, with the wide variation between pollsters down more with the way the numbers are weighted than the raw data itself.

‘The raw voting intention data behind the most recent polls from each of the main pollsters is relatively similar, with a limited spread across companies,’ said Peter Sidorov, economist at Deutsche Bank.

He said the wide range in the Tory lead from the different polling companies was down to the different methods they have employed to compensate for the historical underestimating of the Tory vote, as seen vividly in 2015’s general election.

Markets meanwhile appear confident the Tories will substantially extend their majority, which stood at just 12 seats in the last election.

The best gauge of this has been the pound, which surged after Theresa May’s announcement she would seek a vote on a snap election, in anticipation of a Tory landslide.

While sterling’s progress since then has been less spectacular, the pound has been subjected only to wobbles, not sustained sell-offs, as polls have shown the Conservative lead shrinking.

But should today’s vote deliver anything other than a significantly larger Tory majority, the pound could be vulnerable. Fifty appears to be the magic number: some have suggested that a majority smaller than that could spark fears of a hard Brexit, weighing on sterling.

Hung parliament

A bigger sell-off would be reserved for the still unlikely outcome of the Tories failing to gain a majority.

‘The real downside risk – and the worst case for sterling come Friday morning – is a hung parliament,’ said Chris Turner at ING.

‘Maximum chaos would be if the Conservatives were only able to get somewhere between 290 to 325 seats; it’s the grey area where it’s not enough for a Conservative majority, but also potentially not enough to see a stable Labour-led coalition being formed quickly,’ he said.

He predicted the pound could fall to $1.23 against the dollar in this scenario, with a less dramatic fall to $1.28 were Labour able to swiftly form a coalition, as investors focus on the higher chances of a softer Brexit, potentially outweighing concerns over the party’s economic policies.

Matthews Jennings at fund group Fidelity said a hung parliament, and any coalition that arose from it, would lead to choppy markets.

‘The old truism “the market hates uncertainty” is likely to trigger currency and market volatility as investors ponder the scale of compromise to be made between parties of whatever hue as they try to form a government.’

Should the coalition be Labour-led, investors would be quick to price in the impact of the party’s economic plans. Some sectors of the market would likely come under particularly intense pressure, such as utilities, where Labour has announced nationalisation plans, and the banks, which it plans to prevent from shutting down high street branches.

But investors would also be contending with the potential impact on the UK’s exit from the European Union. ‘Assuming that the Scottish National Party or the Liberal Democrats play a significant role in any coalition, a second Brexit referendum would suddenly become a very real possibility for the first time, making investors reassess their assumptions about Britain and the European Union,’ said Jennings.

Tory landslide

Should the Tory landslide that initially appeared to be on the cards transpire, the market is likely to react in a similar way to its response in April. The surge in sterling then would likely be replicated, with Sidorov tipping $1.32 for the pound.

But the key to further progress from the pound will be the impact of that majority on Brexit negotiations, he said. ‘Under a Conservative majority government, we suspect that we’ll need to see visible progress towards a divorce deal by both sides for the pound to move another leg higher.

‘The pound’s recovery since April has been underpinned by hopes of an orderly transition deal and beyond the election, investors will most likely want to see tangible evidence of progress before buying into a full-blown pound recovery.’

The pound’s fate is likely to play a key role in the progress of the FTSE 100, as it did most dramatically last summer in the Brexit vote. A surge in the pound on a Tory landslide could hamper the index, whose members rely on overseas markets for around three-quarters of their earnings.

But that doesn’t mean any fall in the pound from a Labour victory or coalition would lead to new FTSE 100 highs.

‘On the face of it a wobble in the pound might provide the stock market with a short-term boost. But the implementation of the most radically socialist agenda since Michael Foot’s 1983 “suicide note” would explicitly target corporate earnings and is likely to lead to a severe market correction,’ said Tom Stevenson, investment director at Fidelity.

Narrow victory

‘Perhaps the Goldilocks scenario is a humbled Mrs May, returned to Downing Street with a disappointing majority, forced to change her management style and adopt a more emollient negotiating position. The uncertainty would keep the pound on the back foot. Shares might maintain their recent poise,’ said Stevenson.

8 comments so far. Why not have your say?

Micawber

Jun 08, 2017 at 15:47

Perhaps, could, may, might, conceivably....

Let me add to the subjunctive and conditional speculation....

In the event of a Labour victory, the pound could go down. Manufacturing exports might benefit. Shares in other FTSE 100 companies and others with significant overseas earnings could in consequence go up. The chances of a hard Brexit with no favourable access to the EU would be reduced, which might benefit the City and our EU exporters and service industries. The expansion in government borrowing to spend partly on infrastructure, and proportionate increases in wages of the lower-taxed, might be reflationary. This could lead to a short term boom.

Not that I think this will happen. It just adds to the pile of useless speculation that fills the media with punditry.

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Gleaner

Jun 08, 2017 at 16:44

Nail right on the head there, Micawber.

The TV and newspaper barons have bought us to the edge of tedium.

The skill of the interviewer to trip up the politician seems far more important than the message that politician is trying to deliver. The newspaper barons have gone into hyper-drive to push their respective aims today.

The UK markets are high, but are unlikely to tumble until the American markets crash.

I have this nagging feeling that the whole election is a May/ Tory remainer master plan to get us out of Brexit, what bigger sop than Jeremy Corbyn to carry the can for its failure.

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Sinic

Jun 08, 2017 at 17:44

Journalists are paid for the words write and speak. It matters not that most of what they produce is verbage or white noise. I think that most informed investors would back the view that the Conservatives will be returned with a modestly increased majority of 20 to 40 seats. No hung parliament, no landslide and no miraculous recovery or Diane Abbott.

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an elder one

Jun 08, 2017 at 17:50

It's a mad world; worth leaving; at my age, an event not far off. The thought of Corbyn as PM makes me feel sick, whatever the economic outcome.

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Anthony Tinslay

Jun 08, 2017 at 18:36

All very straightforward - a quick analysis of all 650 or so seats clearly indicates a Conservative majority of 67, You may as well believe this as being as good a forecast as any other pundit - At least Dianne Abbott can then continue her recovery in peace and dear Jeremy can return to talking to the next generation and promise everything to all. by courtesy of the golden money tree

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Micawber

Jun 08, 2017 at 22:52

Well, the exit polls suggest YouGov was right. Close call, Tories largest party but overall majority in question. We'll find out in the morning..... Goodnight.

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an elder one

Jun 08, 2017 at 23:17

Well Teresa blew it; should have kept her trap shut re the manifesto, trying to be honest with the young peasants on matters they don't understand. All the U turns made her look shaky too.

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Gleaner

Jun 09, 2017 at 12:21

It was the difference between one promising the earth and the other promising the prospect of paying for it

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