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Why has a Snap Election been called?
On April 18th PM Theresa May surprised many by calling for a snap election for June 8th . May stated that her reason in doing so was to “strengthen her hand in Brexit negotiations”. While at the time that the snap election had being called, the Conservative party had a commanding 20ppt lead in the opinion polls, an opportunity that may not occur again. As such, a result of this size would make it harder for parliament to overthrow any deal May returns with from Brussels, potentially leading to a cleaner Brexit with the risk of a ‘no deal’ lower.
UK pollsters were originally predicting a landslide for PM May backin April, subsequently leading many to believe that the risk surrounding the election is relatively low, with the Conservative party seen increasing their current majority by some 75-125 seats. However, a notable shift in the polls has been observed since the release of both the Conservatives and Labour parties’ manifestos, moving in favour of the latter. In turn, this has resulted in some modest pullback from 2017 highs in recent weeks and somewhat elevating the risk regarding the election with some polls narrowing the Conservatives lead to as low as 4ppts. However, given the recent performance of UK pollsters over the 2015 election and EU referendum, they could be taken with a pinch of salt.
Most Likely: PM May to win a larger majority (50+) which would supposedly allow for a much more stable Brexit process, through consolidating power while also making her less vulnerable to remainers within her own party, while the risk of a ‘no deal’ is lower and in turn lead to a cleaner Brexit. This can also suggest that it would be easier for PM May to agree on a transitional deal with the EU, mitigating some of the negative economic effects, as the next election will not take place until May 2022.
Market Reaction: Initial spike in GBP, however given the rise in the currency since the announcement (1.2520 to 1.2900), this outcome has largely been priced in which could limit any move to the upside, consequently leading to a ‘buy the rumour, sell the fact price action. Stocks to watch: Centrica and SSE likely to take a hit if the Conservatives impose a cap on standard variable tariffs. As it stands, GBP/USD o/n vol is to reside around 29/120 pips.
Likely: The conservative party win a slim majority (5-10 more seats) or relatively unchanged from current. This could possibly lead to a less stable government, making Theresa May more vulnerable to Brexit hardliners within her own party, subsequently raising the possibility of a ‘no deal’.
Market Reaction: Risks are tilted to the downside and as such, this outcome would likely see GBP met with selling pressure, alongside a fall in UK Gilt yields as some suggest this risks a more confrontational approach to Brexit negotiations, subsequently increasing uncertainty.
Unlikely: Labour manage to pull a surprise and form a majority through a coalition with SNP and Lib Dem, this would undoubtedly complicate Brexit negotiations, with analysts at Danske Bank noting that this outcome could potentially lead to Brexit being cancelled altogether or sway to a softer Brexit.
Market Reaction: In an immediate reaction, GBP will likely drop off alongside equity markets as a whirlwind of uncertainty lingers over UK political front. Analysts at PIMCO state focus will shift towards a looser fiscal policy and an untested government. Stocks to look out for would be UK utilities (Severn Trent, Centrica, SSE, National Utilities and United Utilities) which would likely drop off amid Labour’s plans of nationalisation.
Timing of election results
For a full schedule of election result timings please click here