U.K. Assets Give Early Confidence Vote as May Calls Election

Updated on
  • Pound climbs to highest since October, gilts pare gains
  • May plans to hold election on June 8 to get Brexit backing

Is May’s Call for an Early Election a Risky Move?

Prime Minister Theresa May’s plan for snap general elections on June 8 received early backing from U.K. markets.

The pound jumped to the highest in six months versus the dollar, having weakened as much as 0.4 percent before the unexpected Downing Street announcement. U.K. gilts pared an advance that earlier took 10-year yields to the lowest since October. Stocks were the outlier, with the FTSE 100 Index reaching the lowest since February as sterling’s gains hurt exporters.

Polls show May’s Conservative Party is more than 20 points ahead of the main opposition -- giving her an opening to consolidate her power. The surprise statement came less than a month after May triggered the formal start of Brexit.

“Our take in general is that it should be seen as a favorable development,” said Lee Hardman, a foreign-exchange strategist at MUFG. “By holding an early election Theresa May and the Conservative government will be able to strengthen their majority and that will give her more power and influence during the Brexit negotiations. The polls are sending a very strong signal that the Conservative government is well ahead and there is no real credible opposition at this time.”

Deutsche Bank’s Dominic Konstam and UniCredit’s Vasileios Gkionakis react to May’s announcement on Bloomberg TV.

Source: Bloomberg

The U.K. currency climbed 1.7 percent to $1.2780 as of 1:25 p.m. in New York, after earlier touching $1.2785. The gains took the currency above its 200-day moving average for the first time since the June 23 Brexit referendum. U.K. 10-year bonds yield 1.01 percent, after earlier falling below 1 percent for the first time since October.

Still, the pound remains about 14 percent weaker since the referendum in 2016, while the snap elections represent yet another political risk event for U.K. markets -- which have dealt with Brexit, another election and the Scottish referendum in the past three years. A measure of two-month implied volatility for the pound against the dollar, which covers June 8, climbed the most since March 8.

The FTSE 100 index hit the lowest since February after the announcement, sliding 2.5 percent. Miners including Anglo American Plc, Glencore Plc and BHP Billiton Plc slumped, while banks also fell, with Barclays Plc and Royal Bank of Scotland Group trading lower.

The FTSE 250 Index was down 1.2 percent, reversing some of the gains made last week. Despite the day’s drop, charts show the index is still in a bullish trend started in November, hitting a record high last week.

Analysts Comments

  • “One of the large factors weighing on GBP since the referendum has been uncertainty,” said Esther Reichelt, a foreign-currency strategist at Commerzbank AG in Frankfurt. “There’s still a huge risk premium priced in -- with a stronger majority the uncertainty would be much lower.”
    • “This is a positive announcement for the pound and will help the currency as long as the governing party still leads in the polls.”
  • May’s decision to call an election is a “smart move,” Vasileios Gkionakis, a global FX strategist at UniCredit, says on Bloomberg TV
    • “It’s good to have the elections now that you have good U.K. numbers, which are mostly dependent on global growth, because when you start seeing the U.K. idiosyncratic factors filtering through, potentially her popularity is going to throb a bit.”