Issue of the week: the election and the City
Investors are calculating that a win for Theresa May may mean a “softer” Brexit. They shouldn’t count on it
Theresa May has rubbished the idea of a snap election so many times, said Kate Allen and Roger Blitz in the FT, “that investors were left with no choice but to assume that the UK and the pound were heading for a long period of Brexit uncertainty”. All that changed on Tuesday, when the PM “took financial markets and Westminster off guard” with her announcement of a 8 June poll. In the words of Deutsche Bank’s George Saravelos – hitherto “one of the most bearish sterling strategists” – the move was “a game changer” for sterling. The pound promptly jumped to a five-month high, breaking out of the $1.20-$1.27 range it has been anchored to since midOctober. The FTSE 100 headed in the opposite direction, suffering its worst one-day loss since last year’s referendum.
Much of the 180-point fall in the FTSE 100 can be explained by the stronger pound, “which depresses the value of many bigdollar earners in the index”, said Nils Pratley in The Guardian. The real question is why sterling reacted so strongly. “It was because investors calculated – counter-intuitively at first glance – that a bigger Tory majority, if that’s what follows, will mean a softer form of Brexit.” As Deutsche Bank points out, it would set May free from the unrealistic timetable set by the hard Brexiteers in her own party, and “dilute their influence” – enabling the Government “to compromise over transitional agreements”, and reducing the “crash risk” of Brexit negotiations. Still, May’s move isn’t without risk, said Alistair Osborne in The Times. For one thing, she’ll have to produce a manifesto “spelling out her Brexit stance on immigration and trade” and other tricky matters. What will she say, for example, on the potentially vote-losing issues of triple-lock pensions and tax rises? No doubt she’d like to do away with former chancellor George Osborne’s daft “tax lock” pledge, which got his successor into such trouble in the Budget. “Not everyone will like that, maybe even a certain part-time newspaper editor.”
In economic terms, the PM couldn’t have chosen a better moment to call an election, said Alex Brummer in the Daily Mail. “By happy coincidence”, the IMF has again upgraded its forecast for UK GDP this year to 2%, keeping Britain “top of the class with the US” in the G7 growth stakes. True, “studies have found a strong correlation between GDP growth and voting behaviour”, said The Economist. “But things are changing.” New analysis suggests that, post the financial crisis, voters in Europe have grown “deeply hostile towards governing parties”, regardless of the state of the economy. If May believes “money in voters’ pockets” alone will keep her in power, she could be in for “a nasty surprise”.