After weeks of campaigning and countless opinion polls from organisations commisioned from across the political spectrum, the expectation was that the election would be almost too close to call. Commentators had been fairly settles on the Conservatives taking the most seats but by only maybe 10 to 20 seats at most. The result has taken the vast majority of people by surprise as the Conservatives have won an overall majority. But what will be the imapct on sterling, on equities and Gilts following the UK General Election?
At 2200BST the polling booths closed and the Exit Poll could be officially be released. Conservatives being the largest party but still short of a majority. The reaction on Sterling was instant. A 150 pip jump on Cable was seen in a matter of minutes. The feeling was that the exit poll must have been wrong as the opinion polls had been so close. There was a minor wobble on sterlign , but as the night progressed, it became apparent that the exit poll had actually under estimated the degree of the Conservative victory and in the end with just a handful of seats to be declared, it looks asthough there may be a majority of perhaps 10. What does this mean though to the financial markets?
Starting with sterling, this is probably the most market friendly result. The Conservatives now have the madate to engage their fiscal prudence and their policies are also seen as the best drivers of economic growth. This is a positive for sterling. The big elephant in the room though is the question mark over European Union membership. The Conservatives are committed to a referendum on the UK’s membership of the EU. Supposedly coming after an attempt by Prime Minister Cameron to reform the UK’s role in the EU. This raises the potential for a “Brexit” (British exit) however the opinion polls suggest there is little real will of the population to come out of Europe. It is the uncertainty though which will be a drag on Sterling. However on a net basis, aside form volatility in the run up to any referendum, sterling should benefit from the new Conservative governmnent.
The instant maket reaction was strongly positive for sterling and this can be expected to continue. A break above $1.5550 on GBP/USD would be a key upside breakout and be a big signal going forward for gains on Cable. VERDICT: POSITIVE FOR STERLING.
UK Equities have also reacted strongly across the board. A series of anti-market policies proposed by the Labour Party are now no longer going to be imposed and there has been a significantly positive reaction. WIth no imposition of levies on the banks, no threat of extra taxes on the tobacco companies, no mansion tax to stymie the housing market, and a generally more pro-business tax environment means that a string of gains are being seen.
The FTSE 100 is fairly international in focus, with around three quarters of revenues generated abroad, however nonetheless the index is still up 2%. Perhaps a better gauge is the FTSE 250 (the mid cap index) which is a much better gauge of UK plc), with gains of 3% seen today. Perhaps some of the gain is due to there not being a hung parliament, however, the market is clearly happy with a Conservative government. VERDICT: POSITIVE FOR UK EQUITIES
Another impact could be seen on UK Gilts, which have been strong today. There has beena sharp decline in yields, which suggests that the market is happy with the deficit reduction policies of a Conservative government. It might also give the Bank of England an excuse to keep monetary policy looser for longer. There is a caveat though, with ratings agency Moodys already coming out and suggesting that an EU referendum may impact negatively on the UK’s sovereign credit rating. This could create volatility on Gilt yields, which is already being seen today with the 10 year yield spiking around. Also the UK yields seem to still be moving around with Treasuries so it may not be that simple. However as a general rule, VERDICT: MILDLY POSITIVE FOR UK GILTS