As exit polls start to be released from around 10pm tonight, all eyes will start turning to the reaction from global investors, and how that impacts the pound, gilts and the FTSE 100.
As UK voters head to the polls today, the outcome is less certain than previously thought.
A last-minute boost for Labour in the polls suggests Theresa May and the Conservative Party could come under pressure as the counting begins, although as we know, opinion polls have been spectacularly wrong before.
With an exit poll due at 10pm tonight, we should have a clearer indication of which way Britain has voted. But what will it all mean for the UK’s major markets and the pound?
The FTSE 100 index of the UK’s largest companies has performed well since last year’s vote for Brexit, as the weakness of the pound offered a boost to overseas earning companies.
Theresa May’s snap election announcement caused the pound to strengthen, in turn pushing down the FTSE. Since then, the index has powered upwards to set a new record closing high in May above the 7,500 mark.
Unsurprisingly, clear cut election campaigns tend to be good news for stock markets, research from Schroders suggests.
The fund group looked at the final six weeks of the last seven general elections and found that the FTSE 100 rose on three occasions, each time when the result was regarded as fairly certain. This included Labour’s wins in 1997 and 2001 and a Conservative victory in 1987.
When elections have been a close affair, markets have retreated. The FTSE 100 fell more than 8 per cent in the run-up to the 2010 election when a Coalition government was formed. So we could see significant market volatility if the result of this election surprises.
On election day so far, investors are sitting on their hands so far, with the FTSE 100 flat at 7,479.
UK government bonds
UK gilts offer a safe haven for risk-averse investors, so the Conservatives failing to get a majority could trigger a flight to safety and push up government bond yields.
However, with 10-year gilts yielding 1 per cent, this may not be very attractive to investors if they consider a Labour government would need to issue many more bonds to raise money for its ambitious spending plans.
JPMorgan has predicted a Tory majority of fewer than 20 seats would send the 10-year gilt yield up 5-10 basis points, a hung parliament or coalition would add 10-20bp, while a Labour majority would see 30-50bp added to yields as well as a “substantial sell-off”, the FT reports.
The yield on a 10-year gilt is currently at 1.01 per cent, down from a recent high of 1.20 per cent.
A victory for Theresa May would most likely cause sterling to rally, as investors will like the continuity of leadership and the promise of a tough stance on the Brexit negotiations which begin on 19 June.