How the UK General Election outcome may affect financial markets

09 June 2017

“Strong and Stable”: that was the tag line, that was the pledge, that is what this election was meant to deliver. Instead we are waking up for the 2nd year in a row to more questions than answers.

Will there be a coalition? Will there be a minority government? Will it be Conservatives? Will it be Labour? Will Theresa May remain as Tory leader and Prime Minister? Will Jeremy Corbyn remain as Labour leader?  Will there be another election this year? Will there be another EU referendum?

These are just some of the questions we don’t know the answer to and will only find out the answers in the coming hours and days. Time is of the essence with only 10 days to go before the Brexit negations begin.

Where the result leaves these negotiations is highly uncertain.  It is unlikely to be resolved in the short term:  Hard or soft?  Could we see a cliff edge departure at the end of the two-year deadline following the triggering of Article 50?  A deal is possible to extend the timetable for Brexit, but this is dependent on the agreement of all 27 EU members, let alone a coherent approach from a UK government with no majority!  Talks with the EU are due to start on 19 June, but the approach the UK will take has been left in disarray following the election result.

With no party having an out and out majority any coalition involving the Lib Dems or the SNP will most likely come at the price of another referendum (either EU or Scottish or both!); just how palatable that will be to members of the two main parties remains to be seen.  Instead the Tories may decide that coalitions with the smaller parties like the DUP and others will be the preferred choice of partner but just what the price of this will be, we don’t know.

The immediate implication, that this result will give impetus to a softer approach, is not so clear; a weaker position gives greater power to those Eurosceptic Conservative MPs, and indeed to any with marginal positions.  This is further complicated by the need to satisfy any coalition partners.

To quote the godfather part 2 ‘Power is nothing without control’ and it is hard to see any political personality wielding power or control at this point in time.


Currency markets abhor instability and uncertainty.  This was evident in falls in sterling following recent opinion polls.  The value of sterling fell 1.9% versus the dollar following the publication of the exit polls at 10pm on election night and has since recovered slightly.

In the short term at least, we expect volatility and the scope for further falls versus other major currencies. 

Bond yields and inflation

Forecasts for shorter term increases in inflation have been realised over 2017.  Further weakening in sterling could provide greater inflationary pressure but we would need to see further double digit falls repeated for a material impact.  Long dated bond yields have continued to point to a muted view on future inflation.

Bond yields could fall as investors seek a safe haven.  Over the medium term, greater uncertainty over Brexit lends itself to a narrative of “lower for longer”. 

Market Reaction

It has been said many times before and will be said many times after today: ‘markets do not like uncertainty’ and although this uncertainty will cause volatility, the effect should be limited to the UK markets.

The market reaction since open has been mixed, the FTSE 100 with its international revenues steams has been buoyed by the fall in sterling much as it was following the referendum vote last year. The more domestically focused FTSE 250 has fallen on the back of the uncertainty caused by the result.

In general, we’ve seen strong resilience from equity markets to political stability.  Newsflow on European, US and China economic data is far more influential.

Investors should consider carefully the implications for their portfolios, and how much volatility and risk they can tolerate.  However, as always, be wary of over- and knee-jerk reactions.  


Mark McNulty, Managing Director, Investment Solutions | T: +44 20 7528 4025 | E:

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