This morning, UK Prime Minister Theresa May announced the government’s intention to hold a snap general election on 8 June 2017. Parliament will vote to set a date for the election tomorrow, needing a supermajority of two-thirds in favour to pass, although this is expected with the opposition leader Jeremy Corbyn having already welcomed the decision.
Today’s announcement demonstrates the high level of confidence the Prime Minister has in her government’s standing and, arguably, its lack of strong opposition. Indeed, it is understandable why she would seek to hold a general election now, as polls currently show the Conservative Party holding a significant lead over Labour, the Liberal Democrats and the Scottish National Party (Figure 1). We note that she could have waited until next year’s boundary reforms were implemented before holding an election, as these are expected to strengthen the Conservative Party’s position further.
Market reaction and our expectations
Once it was announced that the Prime Minister would hold a press conference this morning sterling sold off, as it was both unexpected and there were no details about the content ahead of time. However, since it was confirmed that the government will seek to hold a general election, the currency has bounced back and is now trading at new monthly highs. In our view, this reflects the fact that an improved Conservative majority would strengthen the Party’s negotiating position against the European Union (EU). We note that sterling’s rally should be put in the context of the currency trading at depressed levels following last June’s referendum.
Near term, we expect the forthcoming general election to weigh on investor sentiment, as it will create further uncertainty. This is evident in the fact that UK gilt yields have continued their downtrend this morning, reaching new 2017 lows. The government has consistently pushed back against revealing too much about its negotiating position with the EU in advance and, as a result, its plans are largely unknown at present. However, during the campaigning process the various UK political parties may be forced to reveal their plans in regard of the UK’s secession. As a result, we may learn some of the areas that the government wishes to focus on and others which it sees as ‘red lines’.
If the government’s manifesto seeks to dominate the middle ground and leads the market to believe it is seeking a ‘soft’ Brexit, this may give further buoyancy to sterling. However, as we have seen since the last June’s referendum, any sterling strength is likely to be negative for the FTSE 100 Index, given it’s skew towards international earnings, and vice versa for sterling weakness. Ultimately, we see potential for the election to be a significant positive for the UK in the medium term, as the victorious party is likely to hold greater authority when proposing and implementing their policies, whether this be in regard to Brexit negotiations or otherwise.
Figure 1: Polls show that the Conservative Party has strengthened its lead over the other since 2015’s general election, based on opinion polls taken between 10 and 27 March 2017 (total seats available, 650).
This article was first published by Brookes MacDonald in 18th April 2017.