What is the impact of the UK election?
As I write, the BBC is reporting that May is seeking an audience with the Queen at 12.30pm to ask for permission to form a government.
With just one seat left to declare their results, the Conservatives have 318 seats which is somewhat short of an outright majority. If Sinn Fein continues not to take their seats in Westminster they would need 322 for a majority. With the co-operation of the Democratic Unionist Party (“DUP”), who have 10 seats, they could hold a majority. While this is a disastrous result for the Prime Minister and a much better than expected result for Labour, it is not a victory for the Labour party who only have 261 seats so far. Corbyn has suggested that he would be ready to form a minority government but it is near impossible to see how he could pull enough votes together to pass a Queen’s Speech let alone survive for long. Even If May manages to hold on to power, I would doubt the Conservatives will want to go into another election with her as their leader and another election could be sooner rather than later. Not exactly the “strong and stable government” the Tories wanted.
While the DUP are pro-Brexit and could support some Tory policies, there are significant differences to overcome for a coalition to work. The DUP manifesto has 30 focus points on Brexit and amounts to a wish to see a soft exit from the EU. They want an open border with the south, continued access to the free trade zone and support for agriculture to continue. In short, they want the benefits without the costs. Away from Brexit, they want to cut corporation tax to compete with the south; they want to restore devolution to the Northern Ireland Assembly but want closer ties with the rest of the Union; they want to maintain the triple lock on pension that the Conservatives dropped in their manifesto; they would not want to support conservative welfare cuts; they want more government help getting foreign direct investment in Ulster. To conclude, it seems as though they want to have their cake and eat it. Some compromise will have to be made but a softer Brexit is looking far more likely than if the Tories had won a comfortable majority.
The immediate market impact has been for a 2% fall in sterling. This has supported the FTSE 100 Index which is dominated by international companies. The index was up 90 points when it opened although this has moderated a little since. The uncertainty makes any potential rate rises less likely and this is providing some support for Gilts. With a weaker sterling, inflation may be higher which supports inflation linked gilts. Many of these moves reflect the changes post Brexit. I would caution that if the market comes to the view that a soft Brexit is more likely, these moves could reverse.
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