UK: Its all about election day now - SocGen

Kit Juckes , Research Analyst at Societe Generale, suggests that in 48 hours we will hopefully have a result to the UK election as there’s a non-negligible risk that a poorly-run campaign by the Prime Minister delivers shambles instead of enhanced majority.

Key Quotes

“At this point there are a number of possible outcomes: Firstly, a surprisingly sizeable Conservative majority (Conservative seats going up from 331 to over 340, say?) would be a relief for the Government, and for Mrs May. Sterling too, would probably benefit . The Gilt curve might flatten somewhat and we’d get back to watching economic data. A majority that is barely bigger than the current one (17), or smaller, would be bad for Mrs may, might limit her ability to negotiate a Brexit deal (increasing the danger of leaving the EU with no deal) and would be slightly GBP-negative. A result which left the Conservatives trying to form a minority government would multiply the uncertainty and be more negative for the currency. A Labour/SNP working arrangement (I’m ruling out an outright Labour win) would hurt risk sentiment and sterling would fall then too, partly because Labour is also committed to leaving the EU and to regaining control of the UKs borders. However, such a deal is the only one which holds out the faintest possibility of a deal later to negotiate access to the Single Market (though that might well need a second referendum). Maybe this is a ‘buy on the dip’ outcome, though the dip would be substantial.”

“The backdrop to all of this though, is that the pound is cheap. When you look at it in tradeweighted terms, it has bounced of similar levels to those seen after the exit from the ERM and after the financial crisis in 2008. Is Brexit worse than those? In the short run, it isn’t. In the long run, it may well be. The pound’s post-ERM fall restored competitiveness while retaining access to the Single Market, which is an improvement on the current situation. Rates fell sharply, which they can’t do now, and the unemployment rate fell too. As for 2008, that was a worse crisis though the UK wasn’t alone. And at least there was room for a major fiscal and monetary policy response.”

‘That’s just to point out that from here, a huge sterling fall, on any outcome, is unlikely. Sterling’s cheap, but Brexit will keep it cheap for longer than was the case after 1992 or 2008. It’s a sell, but only against other cheap currencies that have room to rally. Which really means selling it against the euro and other European currencies which have been held down by ECB policy and political uncertainty of their own.’