As if political uncertainty was in short supply, Theresa May’s decision to call an early General Election, seeking stability, has achieved the opposite.
The outcome of the election, while clearly a surprise relative to expectations just a few weeks ago, seems broadly consistent with the trend in opinion polls in the run up to the vote which showed an increase in support for Labour at the expense of the Conservatives.
Amid the noise, there are three aspects worth investors’ attention: first, what the election outcome means for short-run asset pricing; second, what it means for the Brexit negotiations; and third, what might be the longer-run implications for the economy.
With regard to the short run reaction of financial markets, volatility has followed the path of least resistance, with sterling weakening – but the move has been relatively tiny: barely visible compared with past sharp currency moves indicative, perhaps, of the competing emotional drivers of increased political uncertainty versus the perception of reduced ‘hard Brexit’ risk.
Gilts and equities haven’t really got going yet, but futures markets look unruffled. It is hard to disagree with this, given the fact that the inflation, growth and interest rate outlook should probably be the same today as it was yesterday.
From the perspective of global financial markets, the UK election is ‘noise’ – a distraction; the intensity of which has probably been heightened both by recent terrorist attacks and by the pattern of referendums and elections globally which have shown the capacity to produce results, and asset price behaviour, at odds with received wisdom beforehand.
All in all, the reaction of markets is, despite the volume of noise, to shrug off this result.
In terms of the Brexit negotiations, it is tempting to conclude that a ‘hard Brexit’ is now ruled out. This is probably a mistake. It is far from clear that any sensible conclusions can be drawn with regard either to what the UK’s exit deal will look like, or on the development of eventual trade deals. As with all negotiations, progress towards an agreement rarely develops in a straight line. Therefore, it is wholly inappropriate to draw conclusions on a ‘hard’ or ‘soft’ Brexit in incremental stages based upon the supposition that the latest information we have provides us with insight into the eventual outcome – especially when it totally disregards the stance of the other side of those negotiations.