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Brexit Briefing: What if Labour Wins on Thursday?

Brexit Briefing: What if Labour Wins on Thursday?

2017-06-05 15:46:00
Martin Essex, MSTA, Analyst

Talking Points

- Another opinion poll has suggested that this Thursday’s UK General Election could result in a hung parliament, with no party winning an absolute majority.

- Such a result, or a Labour win, would likely send the British Pound and UK stocks tumbling.

- Further volatility is likely when the Brexit talks begin only 11 days later, on June 19, with UK assets buffeted by the headlines before a clear path emerges.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

According to the latest opinion polls, published after the terrorist attack on London, Thursday’s UK General Election could go any way: a victory for Prime Minister Theresa May’s ruling Conservative Party, a hung parliament with the Conservatives the largest party, or even – albeit less likely – a victory by the opposition Labour Party.

For the British Pound and London-listed stocks, that’s likely to mean an extraordinarily high level of volatility this week. It also means that a big question mark now hangs over the Brexit talks between the UK and the EU that are likely to begin on June 19.

It was already likely that Sterling and London stocks would be buffeted in the weeks to follow by adverse headlines before a clear path to the divorce emerges. Now, though, the possibility of a minority Conservative government or a Labour one has added an extra layer of uncertainty that could make the road to Brexit even rockier for the UK markets.

The latest YouGov/Sunday Times opinion poll puts the Conservatives on 42% and Labour on 38%, a lead of just four percentage points. More importantly, it predicts that the Conservatives will win only 305 seats in the House of Commons, above Labour’s 268 but well short of the 326 seats needed for a majority.

Of course, that needs to be taken with a pinch of salt. Another poll by ICM/The Guardian gives the Conservatives a much higher 11 percentage point lead and, anyway, such polls have often proved wide of the mark in the past. Moreover, the betting market still has the Conservatives as odds-on favorites, many quoting odds of around 1/10.

That means any result other than a Conservative victory is still seen as highly unlikely. But what if they’re wrong? What if Labour wins or the Conservatives fail to win a majority? Not only would the Pound and UK stock prices fall, as the markets see the Conservatives as friendlier, but everything we thought we knew about the Brexit talks would be turned on its head.

Every headline from the talks would buffet the markets. It would anyway. But if there were a hung parliament any agreement by the UK side would need opposition approval. If there were a Labour government, it would need to draw its red lines quickly and firmly.

Such trading conditions would be very difficult for inexperienced traders and a challenge for even those more experienced. So a cautious approach and tight stops will be the order of the day.

Markets

Index / Exchange Rate

Change (Exchange Hours/GMT Session Rollover)

Market Close/Last

FTSE 100

-0.25%

7,529

DAX

Closed

12,823

GBP/USD

+0.28%

1.2923

EUR/USD

-0.27%

1.1250

EUR/GBP

-0.64%

0.8704

Upcoming UK/EU Event Risk

Events

Date, Time (GMT)

Forecast

Previous

Euro-Zone Sentix Investor Confidence (Jun)

Jun 6, 0830

27.4

27.4

Euro-Zone Retail Sales (MoM) (Apr)

Jun 6, 0900

0.1%

0.3%

Euro-Zone Retail Sales (YoY) (Apr)

Jun 6, 0900

2.1%

2.3%

ECB Publishes Weekly, Monthly Data on QE Holdings

Jun 6, 1345

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

If you’re looking for trading ideas, check out our Trading Guides; they’re free and updated for the second quarter of 2017

If you’re looking for ideas more short-term in nature, check out the IG Client Sentiment Data

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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