The UK election has been one of the biggest political shockers for decades, the Conservatives looks set to take 329 seats, enough to form a Conservative majority government, something that seemed impossible this time yesterday. We can forget all the talk about fractious coalitions and horse trading between political parties, Cameron is already back in Downing Street, and the risk of months of political uncertainty in the UK has been eradicated.
Cameron is expected to see the Queen at 1230 BST/ 0630 ET, to inform her of the election result and his intension to form a government. After that we expect a press conference outside Number 10, and later today we could even hear about the make-up of his new cabinet.
An easy first few months in power for Cameron:
There are plenty of shell-shocked UK politicians this morning; the biggest loss for Labour was shadow Chancellor Ed Balls losing his seat. We are expecting the Lib Dem leader to resign, Ed Miliband, head of the opposition Labour party, is expected to resign later today. Could his brother come back????
Disarray within the opposition matters to markets because although the Conservatives have won the election, they only have a slim majority. It may only take a couple of by-elections in the next 5 years to force a new election, however that concern for Tory HQ is for another day. The crushing of the Lib Dems and the disappointing result for Labour leaves these opposition parties in soul-searching territory for the next few months. We expect leadership contests for both Labour and the Lib Dems, which could give the Tories an easy first few months as the opposition parties get their houses in order.
Small parties not such a threat after all…
Also worth noting is UKIP, the UK Independence Party, who has become the third largest party in the UK. However, the party is only likely to get 1 seat in Parliament, and leader Nigel Farage is expected to lose in South Thanet (although the count has not been confirmed). This is significant, with only 1 MP; it could limit UKIP’s voice in parliament. However, the fact remains that UKIP is the third largest party in the UK, which gives it legitimacy to keep the pressure on the Tories regarding EU membership and immigration, which could trigger market uncertainty in the coming months.
In the lead up to this election some people (us included) had thought that the smaller parties could prove pivotal to this election. Now that the votes have been counted this is no longer a concern, with smaller parties like the Greens and UKIP only getting a couple of seats at most. More of a concern is the astonishing rise of the Scottish National Party who wiped the floor with Labour north of the boarder. They won 56 seats out of 59 in Scotland, which puts another independence referendum back on the agenda; even if Nicola Sturgeon says that this election is not about independence.
Referendum fears:
UK assets may be in euphoric mood today, but that may not last as Cameron has already been talking about an EU referendum, which could take place in 2 years. We also expect Scotland to hold another referendum in the coming years. By the time of the next election in 2020, the UK could be a very different place; it may not even exist in its present form. This uncertainty could limit GBP upside; however, the market is unlikely to price these fears in when they are still only abstracts at this stage.
One thing we need to remember ahead of these potential referendums is that opinion polls can be dramatically wrong, as they were in recent weeks.
What a Conservative majority looks like:
The market has been shocked by this result and this is reflected in the magnitude of the moves in UK asset classes. The pound is the winner in the G10 FX space so far on Friday, and the FTSE 100 is the leading index in Europe. Lloyds Banking Group (LONDON:LLOY), Barclays (LONDON:BARC), HSBC, BT and GlaxoSmithKline are the top performers in the FTSE 100; the financial sector is leading the way as the market prices out the prospect of a Labour government hiking the bank levy.
GBPUSD has made a high of 1.5523 so far, the highest level since late Feb. The next key level of resistance is 1.5637 – the 200-day sma. EURGBP also crumbled on the back of the UK election result. The low in EURGBP so far is 0.7225, which is the largest daily decline for more than a year; on a weekly basis we could see the biggest decline in EURGBP since January.
It could take a huge NFP number to weaken the pound today as the market rushes to price out the prospect of a fractious coalition for the UK.
Figure 1:
Source: FOREX.com and Bloomberg, these prices do not reflect prices offered by FOREX.com
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