Good afternoon,
Tories to dominate dull election
We held a webinar last week on the elections in the UK. Here we summarise our thoughts on what this week’s vote will mean for sterling and Brexit.
This Thursday’s election is not the most important political event taking place in the UK this year; that title will stay resolutely with the negotiations around Brexit when they finally get up and running. For the most part this is just another election and will likely be treated by the markets as such. Elections in the most part in the UK have not been great movers of the pound, the election in 2010 that resulted in a hung parliament being the obvious outlier.
As in every election however, turnover will be crucial. There was a reported increase in voter registrations in the 18-24yr demographic prior to the application closure date. In the UK, those under the age of 50 are more likely to vote for Labour and those over 50 more likely to vote Conservative so for Labour to even have a sniff, Jeremy Corbyn needs the young to put down the PlayStation controller and get to a ballot box.
Previous elections that have broken with the typical 5 year frequency have seen lower than usual turnouts. The last one was in 2001, also in June, wherein turnout fell below 60% for the first time since 1918.
Polls not showing the whole story
The polls have narrowed since Theresa May announced the election although it depends who you listen to as to by how much the Conservative lead has fallen. Over the weekend, a Survation poll had the lead down to 1 percentage point – Conservatives 40, Labour 39 – but this poll is relying on 80% of 18-24yr olds voting on Thursday; their turnout typically only reaches around 40%. Elsewhere the average of that plus polls from Opinium, Comres, ORB, Yougov and ICM was a 7 point lead for the Conservative party.
These popular polls mean little when translated into the cut and thrust of the First Past the Post system. We still think that the Conservatives are sitting on a strong lead of 50-70 points, mainly driven by a message of her being the best person and having the best team to deal with Brexit.
How might sterling react?
Sterling is positioned in an interesting fashion coming into the vote. Risk reversals, contracts that measure traders’ propensity to hedge volatility in a currency pair, have shown that since the beginning of the year the market overall is negative on the pound. The election, however, has only pushed this to 6% of the fall that we saw following the EU referendum last year. Markets are not pricing in anything substantively volatile this Thursday.
Indeed on our central scenario of a Tory win and majority of around 60 seats we think GBP would likely only run 1% higher. This is as long as the majority is above 50 – anything less and we think GBP will slide. A hung parliament would prompt a 2-4% decline as we saw back in 2010 but amplified by Brexit concerns. We proscribe a 5% probability to the chances of a hung parliament.
Once the votes have been counted, focus will return to Brexit and what our new government will try and extract from the negotiations. A decent Tory majority is the status quo for Brexit negotiations as it stands at the moment. Theresa May’s campaign has hinged on a ‘stronger hand’ in the negotiations although we have our doubts that that would materialise. We also see a cabinet reshuffle as very likely although the main Brexit players will likely stay in place.
A diminished Tory majority could trigger another Tory leadership contest and will see leadership on Brexit issues pass to David Davis from the PM while a hung parliament would limit any negotiations taking place until a coalition was built which is an unlikely conclusion. If a coalition was formed there is a slim chance of a softer Brexit if language around immigration can soften.
Have a great week.