Time to get bearish
A market-friendly British election outcome already appears priced in, and the risks are now skewed to a disappointment. Whatever the outcome, we believe a strong Conservative majority is a necessary but not sufficient condition for a smooth Brexit. Initial talks look fraught with difficulty, and the European stance is hardening. Pound positioning is much lighter, the evidence for a consumer-led slowdown continues to build, and the Bank of England is likely to stay firmly on hold through the remainder of the year. All this leaves inflows into Britain highly vulnerable to a rapid slowdown. With the Bank of England on hold, the British flow story looks fragile. In the medium term, financing inflows need to be underpinned by higher yields. At the long-end, Britain-euro zone rate spreads continue to drift lower and short-end euro zone real rates are now above those of Britain for the first time since late 2014. Another concern is the effect of European Central Bank tapering.