Election aftermath: tight timelines loom

14 June 2017

Last weeks election was a close call as we were expecting. But the UK’s fears of uncertainty became a reality after Theresa May failed to clinch a majority. The Conservative Party won 318 seats, falling 8 shy of an outright majority. They were also way down from the 330 seats they held prior to the snap election. Labour leader, Jeremy Corbyn, delivered an unexpectedly strong result and won 262 seats. Meanwhile, the Scottish National Party, Lib Dems and the Democratic Unionist Party (DUP) won 35,12 and 10 seats, respectively. With no one reaching the 326 seats required for a majority, the resulting political stalemate means a hung Parliament. This isn’t the first time in recent memory that a Tory gamble has backfired. Bear in mind David Cameron’s confidence going into the EU referendum last year, resulting in the ongoing Brexit saga.

Market Reaction

Sterling Slumps after Election Shock


The Pound plummeted following the news of a hung Parliament, as investors grew concerned about the impact of such a scenario on Brexit negotiations and thus shunned British assets. The GBP/USD exchange rate hit a 2-month low, while the GBP/EUR exchange rate slumped to a 5-month low.

The FTSE 100 index soars
FTSE 100

The FTSE 100 managed to buck the trend and soared above 7,500 points after the election result. The index is influenced by a whole host of multinationals, who largely benefit from the drop in Sterling. Sector-wise, top performers included miners and exporters, whereas the weakest performers were real estate firms and retailers.

UK 10-yr Bond Yields

UK’s 10-year benchmark bond prices rose on 9th June, as investors sought the relative safe haven status of Government bonds in the wake of an election upset. Subsequently, yield on the 10-yr bonds slumped.

Political developments in the last week

Theresa May assured British citizens that her Government is focused on “delivering a successful Brexit”. She then went on to re-appoint Senior Ministers to her Cabinet. The top five posts remain unchanged, with Philip Hammond, Amber Rudd, Boris Johnson, ‎David Davis and Michael Fallon all holding on to their roles. Meanwhile, she continues to craft a confidence-and-supply agreement with the Northern Ireland’s DUP to prop up a minority Tory government. This carries its own risks, with divergent views held by the two parties, and implications on the Northern Irish peace process.

Separately, EU leaders were quick off the mark in reacting to the UK election result. The European Commission President Jean-Claude Juncker stated that he hoped there would be no delay to Brexit negotiations following the vote. Also, the German Chancellor, Angela Merkel indicated that Brexit negotiations should still go ahead as on schedule despite the political fallout in the UK from the General Election. Following the same theme, Michel Barnier, the Chief Negotiator, stressed urgency on Brexit talks, pointing to the risk of the UK exiting the EU in March 2019 without a clear deal on future relations.

The clock is ticking

Irrespective of the political commotion being played out in Britain, the Brexit count down is still on. The next significant date on the Brexit calendar is 19th June, when the Queen is set to unveil the new Government’s legislative agenda. This itself is at risk of slipping due to the ongoing DUP negotiations. And sources have suggested only today, that any Wednesday announcement  would be “inappropriate” given the Grenfell Tower fire, with full schedules making further discussions difficult. 19th June is also when negotiations with the EU over the terms for leaving are also scheduled to be held.  Officials in Brussels should also be bracing themselves for a delay.

The way ahead?

The Pound is expected to remain volatile for a few weeks, as it finds the reality of a hung Parliament very unsettling. However, things might slowly settle for Sterling, with the possibility of a rapid turnaround in coalition talks and the quick establishment of a working Government. Furthermore, if the Tories manage to strike a coalition with the DUP, the chances of adopting a conciliatory approach towards Brexit negotiations will increase, as the DUP leader Arlene Foster has spoken repeatedly against a “Hard Brexit”. Therefore, once the election dust settles, and assuming the case of a Softer Brexit, it is expected that UK bond yields will rise and stability will return to the Pound. Moreover, political stability in the UK will help attract foreign capital to the country which in turn will cause British equity markets to rise.

But much will unravel over the next week: any failure to reach agreement with the DUP could risk Theresa May losing a critical vote on the Queen’s speech, a situation which Jeremy Corbyn, is eagerly awaiting.