Sterling will “falter” and UK shares and gilts would likely rise if Thursday’s UK general election returns a hung parliament, a leading London economics firm has predicted.
Capital Economics said a hung parliament would weigh on sterling because it assesses “there isn’t much to choose between the Conservative Party and the main opposition Labour Party when it comes to their views on the UK’s departure from the EU”.
Sterling firmed in the immediate aftermath of the call by UK prime minister Theresa May of a snap election, but had recently weakened against the euro, to 87p as opinion polls suggested a tightening race.
“Although bookmakers’ odds still suggest that the Conservative Party will win an outright majority in Thursday’s UK general election, the odds on a hung parliament have shortened considerably in the last few weeks... While there hasn’t been a big reaction in the financial markets, there clearly could be one if the probability became reality,” Capital Economics said.
“But we are not convinced that equity prices would continue to rise, given the political uncertainty. In our view, the main beneficiary from such uncertainty might be UK government bonds.”
EU leaders hope Ms May is re-elected, ideally with a bigger majority, as they do not want her weakened nor do they want an anti-Brexit government, Reuters reported.
However, there is a “growing sense among traders that this could be the 2015 UK election “deja vu all over again,’” according to Stephen Innes, senior Asia-Pacific currency trader at Oanda in Singapore.
Sterling surged after Conservative Party leader David Cameron won a majority in 2015, in contrast with polls at the time. Mr Cameron would later resign after the 2016 Brexit referendum.
For now, sterling is showing it is “desensitised” to the shocks of terrorist atrocities, Mr Innes said.
Travel and leisure sector stocks were among the worst-performing in London, with EasyJet falling 1.9%, and Merlin, which runs attractions including London’s Madame Tussaud’s waxworks museum, down 1.6%. British Airways and Aer Lingus owner IAG fell 1.3%.
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