ETF Securities Research Blog

Further unnecessary political uncertainty and sterling volatility

The promise of ‘strong and stable leadership’ has bred more unnecessary political uncertainty and sterling volatility. With a tough Brexit process now likely, Theresa May could lose her job or be forced into a drawn out process to agree a coalition. This, and a lack of political unity in parliament is also likely to weigh on upcoming Brexit negotiations which are due to begin in 2 weeks’ time.

Market implications:

  • Lack of political unity in parliament is likely to slow Brexit negotiations
  • Currencies are where market worries will be primarily expressed – this means much more currency volatility. A hung parliament could see GBP test 1.25 against the USD, sterling already reacted quite negatively, down to 1.27 – now looks to have stabilised at this level for now. Prior to the election sentiment for GBP was already very weak so likely limits further downside against the EURO.
  • Despite futures showing FTSE 100 opening down since yesterday, typically weak sterling is positive for the index due to their near 70% foreign revenue exposure.
  • FTSE 250 is much more vulnerable to a sell-off as it is much more domestically focussed, although exporters could rally on weak GBP
  • Potential rate hike in second half of the year now looks less likely
  • Broadly inconsequential of European equities

One saving grace for the UK is the Conservative gains in Scotland highlighting an independence referendum now off the table, putting to bed the risks for a UK breakup.

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