Posted on 9 June 2017 by
It’s not only Teresa May who has failed to get what she wanted from the election; the markets will hate the uncertainty created by a hung parliament, the impact of which is likely to be felt in many areas.
We’re now in the highly unusual situation where the leader of the party that won is so badly damaged that she has to resign, whereas the leader of the party that lost is feted and his position as leader shored up. Whether by luck or astute political judgement Jeremy Corbyn has proved to be the master of expectation management!
Before considering the impact of the result on markets, it makes sense to consider the likely relationship of the next government. A Conservative and DUP coalition would have nearly the same number of MPs as the previous Conservative Government and as this appears to be the only viable coalition combination the DUP will have considerable bargaining power. Brexit will obviously be a key consideration for any Northern Ireland party in coalition discussions, but while normally the two parties looking to form a coalition could agree on certain policies it will be more challenging to agree a basis for negotiations with the European Union.
Forming a government must take priority to electing a new leader of the Conservative Party, which presumably means the coalition discussions are likely to be led by a lame duck Prime Minister. As the DUP will have some specific Brexit priorities particularly relevant to Northern Ireland, the challenge of agreeing the basis for negotiations to achieve the best result for the whole of the UK just got a lot more difficult.
A coalition could last the full five years, as the conservative and Liberal Democrat coalition did, but from the markets’ perspective the increased likelihood of another election being called at any time just adds another layer of uncertainty. This uncertainty would be reduced if the new Government abandons the Conservative manifesto promise to repeal the Fixed Term Parliament Act. But a coalition only increases uncertainty about the Brexit negotiation and the ultimate terms of the UK’s exit from the European Union.
The uncertainty created by the election will be unhelpful for both sterling and the economy in general, but it is more difficult to know what effect it will have on interest rates. Although at the current 0.25% Bank Rate is close to the floor, and gilt yields are close to all-time lows, if businesses reduce investment The Bank of England might consider it necessary to provide more stimulus.
On the other hand, whether the new Government lasts a few months or a full five years, markets will factor in the increased risk future uncertainty, and the increase in gilt yields which would likely follow. Therefore, as mortgage rates are around all-time lows, with very limited scope for further falls, but an increased risks of higher rates, our conclusion is that the rationale for many people to choose a medium to long term fixed rate mortgage deal may have got a lot more compelling.
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