Financial markets took the surprise failure of UK Prime Minister Theresa May to secure a Commons majority on the chin, amid a prediction the UK was still relentlessly heading toward a hard Brexit.
Sterling, which since last summer’s Brexit vote has been the main indicator for political turmoil across Europe, sunk 1.5% before rallying somewhat to under 87.7 pence against the euro.
The yield on UK government gilts were little changed, with the 10-year bond trading only slightly higher at 1.04%. The Irish 10-year bond was little changed, at 0.67%.
London’s main FTSE 100 stock index composed of multinational companies that largely earn in foreign currency and therefore benefit when the pound falls, climbed as much as 1.3%, before easing back to trade up 0.7% on the day as the pound recovered a little.
Still, a leading Irish expert predicted the UK will end up striking a hard Brexit deal with the EU, an outcome that is widely seen as harming the Irish economy on both sides of the border.
Associate research professor Edgar Morgenroth, at the think tank the Economic and Social Research Institute, said he believed a hard Brexit was still looming.
“I do not see them (the UK) being part of the single market because they want to control migration. And I suspect their being part of the customs union is also unlikely because there is no advantage to them, and prevents them from doing trade deals with third-party countries.”
Mr Morgenroth said the effect of the potential deal between the Conservatives and the Democratic Unionist Party was hard to call. But a delay in completing the Article 50 talks process in the next two years was likely, not least because it will require ratifying by many EU national and regional parliaments, he said.
Despite the hung parliament, Capital Economics in London said the markets’ reaction did not compare with last summer’s when the UK voted to quit the EU. The election had not led to “Market Mayhem”, they said.
“So why has the decline in the pound, and the reaction in financial markets more generally, been so much less this time around? The key reason is the relative importance of the implications of the two votes. The result of last year’s referendum set the UK on a course to leave the EU, with potentially adverse consequences for the UK economy.
“The outcome of this election is only likely to affect the timetable and outcome of the negotiations surrounding the UK’s departure. Brexit remains almost inevitable,” the economists said.
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