Future Money Fund Manager, Richard Cole, provides his summary of the financial markets' reaction to last night's Conservative election victory:
Boris Johnson’s gamble to call a general election as a means to unlock the deadlock crippling the House of Commons has proven to be a success. Last night’s exit poll suggested a Conservative majority, with a haul of 368 seats, and with a couple of seats still to declare at the time of writing, the final result has come within a whisker of this level.
A strong Conservative majority was seen as a definite possibility in the election run-up, but this result is towards the top end of expectations. This has been a poor election for Jeremy Corbyn and also for the Lib Dems, whose leader, Jo Swinson, lost her seat. Meanwhile, in Scotland, Nicola Sturgeon had a very good night, with the SNP increasing their grip on the political landscape north of the border.
The reaction of financial markets overnight and into the morning has been a positive one, with the pound jumping significantly against both the US dollar and the euro. Such gains for the pound will reduce the value of overseas earnings of British stocks and therefore the big exporters, such as many constituents of the FTSE 100 will face a headwind, but overall we expect the mood to be positive for British companies in the immediate term. Those companies more focused on the domestic economy are likely to rally strongly in this event, and the FTSE 250 is a good example of this, with the index jumping around 4% in early trading.
While investment markets have historically been anti-Brexit, a mood of acceptance has developed over recent months and the relative certainty that today’s result gives is likely to be welcomed by investors overall. Despite misgivings over Brexit, markets held a greater fear over Labour’s policies of nationalisation and high government spending and the high level of borrowing this would have required. As such, with both these directions now ruled out, UK assets are likely to be appreciated again, after the continued uncertainty of recent years bogging down sentiment.
Barring a monumental surprise now, Brexit will be delivered on January 31st, Boris’ aim to “Get Brexit Done” has hit home with voters. Readers should note, however, that this does not mean the end of uncertainty. Withdrawal from the EU is now nearly concluded, but the shape of our future relationship is still far from clear. The Prime Minister’s pledge to agree a free trade deal by the end of 2020 is likely to create further uncertainty and potential volatility in markets as next year moves on. Also adding to this uncertainty will be the battle for a second Scottish Independence referendum, which will no doubt now develop.
A potentially important point to consider, however, as has been pointed out by pundits overnight, is that given the size of the Conservative majority, Boris may no longer be so bound by the will of the more extreme ERG fringe of the party. As such, there is perhaps now more room for Mr Johnson to seek either a closer relationship with the EU than the arch-Brexiteers desire, or to prolong the negotiating period beyond the end of 2020. Whether Mr Johnson takes advantage of this opportunity is yet to be seen, but it is worth considering.
And in other news…
Potential progress has been made on the US/China trade war overnight with President Trump reportedly signing off on the terms of a partial truce between the two powers. This looks to be the conclusion of the “phase one” deal that has been talked about for a couple of months now and while it is far from a full resolution, it may include some roll backs in tariffs and will avoid further tariff hikes, which had been scheduled for the coming days. Asian stock markets were up strongly on this news and so long as this does progress to be officially signed by both countries, this will be seen as an early Christmas present by many in the financial markets. Yet, as ever at this time of year, exuberance can take hold and we must wait until the New Year hangovers have cleared to properly gauge the chance of a full trade war resolution being achieved!
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