Brexit Briefing: UK Election Result Crucial for Divorce Talks, GBP and FTSE

Talking Points

- The result of today’s UK General Election will have a major impact on the Brexit negotiations due to start in 11 days’ time.

- That impact will be the key factor determining the near-term direction of both GBP and London-listed stocks.

- Join Christopher Vecchio for live coverage of ECB President Mario Draghi’s press conference at 1215 GMT.

There are at least four possible outcomes of today’s UK General Election, and their impact on the British Pound, the FTSE 100 index of leading London-listed shares and the FTSE 250 index of medium-cap stocks will be seen through the prism of the Brexit talks due to start 11 days from now. Here are some possible scenarios:

A large majority for Prime Minister Theresa May’s ruling Conservatives:

This is likely to be the best outcome for the Pound. It would strengthen May’s hand in the Brexit negotiations as her authority would be reinforced and she would be able to hold out for a good deal for Britain. Conversely, the resulting strength of the Pound could be bad for the FTSE 100, which continues to have an inverse correlation with the currency. However, the FTSE 250 could gain on the prospect of a “soft Brexit”, which many would see as the most market-friendly outcome.

A small majority for the Conservatives:

This could be a bad outcome for the Pound. As many as 50 Conservative Members’ of Parliament are hard-line Brexiteers and they would be in a good position to block a deal. A “hard Brexit” would be more likely, in which the talks fail and break up without agreement. The UK leaves the European Union acrimoniously and both sides suffer. The Pound and the FTSE 250 would fall and the FTSE 100 climb.

A ‘hung’ Parliament:

This is the scenario in which no party commands a majority. If the Conservatives were the largest party, they would have to win the support of one or more of the opposition parties: Labour, the Scottish Nationalists and/or the Liberal Democrats. All of those would likely hold out for a compromise deal, making a soft Brexit more likely. The market impact would therefore be similar to that of a large Conservative majority. Much the same would be true if Labour were the largest party.

A Labour majority:

The knee-jerk reaction to a Labour win would undoubtedly be a slump in the Pound, and quite possibly for stocks as well. Longer-term, though, those losses could be reversed. Labour campaigned against leaving the EU, as did the Scottish Nationalists and the Liberal Democrats, and would quite possibly reach a softer deal than the Conservatives. This would be long-term positive for UK assets generally.

Conservatives lead in the opinion polls

For the record, an Ipsos MORI opinion poll published Thursday put the Conservatives on 44% and Labour on 36%. That eight percentage point lead was up from a five-point lead in the previous Ipsos MORI poll last Friday.

It’s worth noting too that the markets are likely to react first to exit polls released after the polling booths close at 2100 GMT as these have proved relatively accurate in the past. Within the next few hours the result should be clear.

While European trading desks will likely be staffed, that means the outcome could fall into the relatively thin trading between the New York close and the opening of markets in Australia and Asia. The London stock market will, of course, be closed until Friday morning although out-of-hours trading will take place.

Chart: GBP/USD Daily Timeframe (2017 to Date)

Chart by IG

From a positioning perspective, the markets are already pricing in a Conservative victory so that result would be unlikely to move prices far. Any other result would likely send the Pound down sharply although, as explained above, such weakness could be short-lived. IG Client Sentiment data are currently sending out a bullish signal for GBP/USD.

Now read:

Brexit Briefing: GBP Under Pressure as UK Election Looms

Brexit Briefing: What if Labour Wins on Thursday?

Markets

Upcoming UK/EU Event Risk

--- 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