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?
FTSE 100
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.
The pound
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.
April’s surprise jump in inflation to 2.7 per cent, a four-year high, was largely due to the weakness in the pound since the Brexit vote.
When today’s election result starts to become clear, currency traders will certainly reflect their views in their treatment of pound. But currency strategists have suggested that only a surprise outcome in which the Conservatives did not secure a majority would push the pound outside the $1.28 to $1.30 range.
Because the polls are tightening, JPMorgan Chase has forecast a ‘relief rally’ of between 1 per cent and 2 per cent if the Conservatives increase their parliamentary majority.
Brewin Dolphin’s head of research, Guy Foster, has suggested a hung parliament would be the worst case scenario for the pound, although he stressed this is not something he is predicting.
“A hung parliament would weaken the pound because it would add further uncertainty for business and the economy. A weaker pound would be good for international companies, such as many of those in the FTSE 100, but many UK focused firms could struggle,” he said.
“However, a weaker pound would push up inflation still further because the cost of importing goods would increase. Ordinarily that might push the Bank of England to raise interest rates in a bid to bring inflation back down, but the Bank will be reluctant to do this because households are so heavily indebted that any increase in interest rates could be very painful and may have far-reaching consequences, with some people unable to service more expensive debt repayments.”
Sterling is currently hovering around $1.29.
