Tag Archives: Elections

UK Election: Clutching Defeat from the Jaws of Victory

With the votes having been counted for 649 of the 650-seats in the House of Commons, the ruling Conservatives have 318 seats, a net loss of 12 seats. Labour, the main opposition party, won 261 (+32).

Even if the Conservatives win the 650th seat, they will at best be 7 seats short of an absolute majority and 5 seats short of a working majority – a hung parliament.

Prime Minister Theresa May announced that the Conservatives would form an informal alliance with the Northern Irish DUP which won 10 seats. The DUP would support the Conservatives in key votes, likely in exchange for some say on government policy.

Theresa May’s future seems secure for now but medium-term I would expect her position to come under close scrutiny and a party-leadership battle remains a distinct possibility.

Sterling has weakened about 1.5% post election, in line with my and market expectations. The Conservatives’ loss of seats raises serious questions about Theresa May’s leadership, her decision to trigger early elections and the risk of a party leadership battle to oust her.

Moreover, markets will likely remain concerned about the shelf-life of a Conservative-DUP alliance and its ability to push legislation through parliament.

However, I also see scope for Sterling’s downturn to fade and even reverse in due course. To be clear, a V-shaped Sterling recovery would likely remain elusive.

Two key questions pertain to the likelihood of this new Conservative-DUP formal alliance 1) securing an advantageous EU deal and 2) opting for a “hard” or “soft” version of Brexit.

If anything, the past two months have reinforced my view that the government is ill-equipped, ill-prepared and lacking in institutional capacity to negotiate complex deals with the EU and non-EU partners.

The composition of parliament and its take on Brexit leave Theresa May in somewhat of a bind. The government may therefore have little choice but to seek support from some of the 322 opposition MPs who on the whole favour the UK remaining in the EU or at the very least a “soft” version of Brexit.

So while I do not expect a second referendum on the UK’s membership of the EU, I do see a possibility of the government toning down its rhetoric and potentially opting for a softer version of Brexit – a development which UK financial markets would welcome in my view. 

At the very least, this election has further weakened the idea that nationalist parties in Europe are gaining the upper hand.

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UK Election Special – When Two Tribes Go To War

British voters will on Thursday 8th June vote on the composition of the 650-seat House of Commons – the third major popular vote in two years – after Prime Minister Theresa May’s decision back in April to trigger early general elections.

Theresa May’s motivations were arguably four-fold: (1) Win a popular rather than party mandate, (2) Capitalise on the massive lead in the polls the ruling Conservatives enjoyed over the opposition Labour Party and thus allow her to push through her own agenda, including a possibly softer form of Brexit, (3) Allow the government more time to secure a new EU trade deal, and (4) Strengthen the government’s stance in negotiations with the EU.

Objectives (1) and (3) will likely be met but objectives (2) and (4) may prove more elusive.

Opinion polls point to a trend-fall in popular support for the Conservatives to around 44% and sharp rise for Labour to 35%, with the gap between the two main parties halving to about 9pp from 20pp six weeks ago. Aggregate support for the Liberal Democrats, UKIP, SNP and Green Party is flat-lining around 18%.

However, there is still great discrepancy amongst polling agencies which in the past have misestimated true voting intentions. Moreover the UK’s first-past-the-post electoral system makes it difficult to translate share of votes into seat numbers. Whether the Conservatives significantly improve on their current 330 seats or fail to secure a parliamentary majority, as You Gov currently predicts, is a tough call.

Nevertheless, a number of important themes have emerged in recent months.

First, the slingshot campaign has exposed the frailty and flaws of the Conservative machine, including of its leader and manifesto, and reinforced my view, first set out in December, that the government is ill-equipped, ill-prepared and lacking in institutional capacity to negotiate complex deals with the EU and non-EU partners.

Second, it is a two-horse race between the ruling Conservatives and Labour, with the other parties on course to secure only a modest number of seats – a break with recent elections.

Finally, the political centre of gravity has shifted to the left, with in particular tax rates likely to rise regardless of which party wins next week’s election.

My core scenario is a hollow victory for the Conservatives: 360-370 seats with a low voter turnout. This would reduce the risk of opposition parties and rebel Conservative MPs torpedoing government legislation but would fall short of the landslide victory which Conservatives thought possible back in April.

Finally, a modest (or even significant) increase in the Conservatives’ parliamentary majority is unlikely to materially improve the government’s hand when negotiating with the EU.

 

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Nationalism, French presidential elections and the euro

The shock results of US presidential elections and UK referendum are shining the spotlight on the rise of nationalist and populist policies.
 
The rejection of the political, economic and social status-quo has lead to increasingly vocal predictions that populist and/or nationalist parties will cause major upsets at forthcoming elections in EU member states, including Italy and Austria.
But forecasts that a broad-sweep of nationalist parties will rise to the highest political echelons in EU countries may still be far-fetched.
 
In most cases these parties still command only modest popular support which can be overstated in polls and difficult to translate into actual political power.
 
France is such an example. Support for Marine Le Pen, leader and presidential candidate of the far-right Front National (FN) party, has risen in recent years and she will likely make it to the second round of presidential elections in April-May 2017.
But she is unlikely to become President, with opinion polls showing she would lose the head-to-head vote, almost irrespective of the candidate she faces.
 
Moreover, the FN is likely to remain a minority party following next June’s elections for the French Assembly.
 
France’s presidential and parliamentary elections will in any case have far more modest repercussions for the global economy and asset markets than the election of Donald Trump in the US.
 
Even in the very unlikely event of Marine Le Pen becoming president, the impact on the euro could be modest and short-lived as France’s economy accounts for only 21% of the eurozone’s economy.
 
ECB policy and German elections due in September 2017 are likely to exert greater influence on the euro’s path.
 
It is also noteworthy that the euro has been one of the most stable major currencies in the past six-and-a-half years, despite the Greek crisis and the shock UK referendum result.
 
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