Tag Archives: General Election

GBP – Hawkish Surprise Presents Selling Opportunity

Financial markets in the past week have had to contend with two UK-borne shocks: The ruling Conservative party’s loss of a majority in last Thursday’s general election and three MPC members voting in favour of a 25bp hike at today’s Bank of England policy meeting.

Sterling, which sold off sharply after the election result, has recovered this week and the more hawkish than expected MPC meeting has given the modest rally further impetus.

Confirmation of an alliance between the Conservatives and DUP, which is expected in coming days, may see Sterling strengthen further, particularly with markets digesting the implications of two further MPC members calling for higher rates.

This would, in my view, present an opportunity to short Sterling versus the dollar or euro, for five reasons:

  1. Conservative-DUP marriage is not one of choice and arguably not even one of convenience;
  2. Question of which type of Brexit is unlikely to be answered any time soon;
  3. MPC has become more hawkish but rate hike still unlikely near-term;
  4. Concerns over falling wages are at the heart of a UK economy which remains at best soft; and
  5. EU/eurozone growth slowly picking up and European nationalism on the back foot

Read more

UK General Election Scenario Analysis Impact on Policy, Theresa May and Sterling

In less than 24 hours the British electorate will start voting in the election for the 650-seat House of Commons with the result expected early in the morning of Friday 9th June.

While the last general election was only held two years ago, there is arguably as much if not more at stake this time round than in May 2015.

Opinion polls still point to the ruling Conservatives winning a record-high 44% of the national vote ahead of the opposition Labour Party, but polling agencies which in the past have misestimated true voting intentions still display great inconsistency.

Ultimately it is the number of seats which British parties command which matters and the UK’s first-past-the-post electoral system makes it difficult to predict.

You Gov’s constituency-specific model forecasts the Conservatives winning only 304 seats as a result of a record number of “wasted” votes, a 26-seat loss and well short of both a working and absolute majority. Labour would increase its seat numbers from 229 to 266.

This would result in a hung parliament and either a coalition or minority government.

My own model points to the Conservatives winning around 360 seats (55.4% of total) and Labour 212 seats. Admittedly, this prediction is based on a number of assumptions, namely the net share of votes which Conservatives gain from other parties as well as voter turnout.

Whether the Conservatives significantly improve on their current 330 seats or fail to secure a parliamentary majority remains a tough call and there is an almost infinite number of possible outcomes.

However, I have narrowed down in Figure 10 the number of seats the Conservatives could win to eight possible scenarios, in each case assessing i) Their probability; ii) Their numerical impact on the Conservatives’ majority (or lack thereof); and iii) The risk of opposition parties and/or Conservative backbenchers high-jacking the policy agenda.

Figure 11 assesses for each of the eight scenarios their likely impact on iv) Theresa May’s standing within the Conservative Party and v) Sterling and currency volatility.

Regardless of what happens tomorrow, two events beyond British shores also scheduled for 8th June – the ECB’s policy meeting and Former FBI Director James Comey’s testimony to the Senate Intelligence Committee – will conceivably exacerbate Sterling volatility.
Read more