She made it clear that this election would be about her approach to Brexit, saying current divisions within Westminster jeopardise the UK’s negotiating position with the EU, which she wants to strengthen. Polls suggest that the election is likely to produce a larger Conservative Party majority than the narrow one it currently holds in parliament. We do not expect a large change in expectations around Brexit, except that there is potentially more room for government to let all or some of the negotiations continue past 2020.
Sterling initially fell as preparations for Theresa May’s speech began, but quickly regained its footing , and had even strengthened somewhat at the time of writing. UK equities, which had opened the day down on weaker commodity prices, continued to fall. Government bond yields were little changed, despite some volatility.
Markets are pricing in a minimal change in the UK’s position, both domestically and in the Article 50 negotiations. A stronger government would marginally favour UK risk assets and the pound, given the high value investors place on stability. A resounding victory for Teresa May could also entrench her control over the Conservative Party, allowing her more freedom to negotiate the Brexit deal that best protects the UK’s national interests.
Unless the Conservative Party’s large lead in the polls erodes, markets are likely to price in a continuation of both current domestic policies and the UK’s negotiating stance on Brexit. This should dampen volatility as election day approaches. But if the polls narrow, significant volatility in UK assets, especially sterling, should be expected.
While the June election will generate much press attention and commentary, investors should remain focused on the fundamentals. Global growth conditions, commodity prices and the pace of consumer spending in Britain will likely have more bearing on UK asset returns in coming quarters.
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