UK Election : What Could It Mean To You.

U.K.’s citizens have just voted their next set of Parliament members.

What were the results and why should traders care? Here are a couple of answers:

Why did Theresa May call for snap elections anyway?

Back in mid-April, Prime Minister Theresa May called for a snap election despite her promises to wait for the May 2020 scheduled elections. The plan was to capitalize on her (and her party’s) popularity and strengthen their numbers ahead of the crucial Brexit negotiations.

Back then the Conservative Party held 330 seats, just a smidge above the 326 required to form a majority in the 650 seats of the Lower House. The Labour Party came in second (229 seats), followed by the Scottish National Party (54) and the Liberal Democrats (9).

The pound rallied at her announcement as market players and their cats had bet on a landslide win for the Tories, with polls attributing double-digit leads against the next party.

Did May’s gamble pay off?

Not even a little bit. In the weeks that followed, May’s hard stance on Brexit, two terror attacks in the U.K., a few REALLY unpopular bits in the Conservative Party manifesto, and hard campaigning from her opponents have pulled the Tories’ lead down to uncomfortable levels.

Fast forward to Election Day and now May’s party has…more regrets than seats in the Parliament.

With a voter turnout of 68.7% – the highest since 1997 – and only one more constituency left undeclared, Theresa May’s Conservative Party is expected to snag 318 seats in the Parliament, 12 fewer than when she called for the elections.

The Labour Party is expected to get 261 seats (+31 seats) while the Liberal Democrats (12) and Democratic Unionist Party (10) also added to their numbers. The Scottish National Party (35) also lost seats, though.

What does this mean for the government?

In a word, trouble. With no party reaching parliamentary majority, the U.K. officially has a “hung Parliament.”

Basically, having a hung Parliament means that it will be harder for the MPs to reach decisions. But as leader of the party with the most seats, May will be given a choice if she wants to (a) form a coalition or (b) run a minority government.

Forming a coalition means teaming up Survival-style to get the required 326 votes. In this scenario the Tories would sign a formal coalition as PM David Cameron did with the Liberal Democrats in 2010. The Tories would have to give up control, though, and likely give Cabinet positions to the other party.

Or they could choose to run a minority government and enter into “confidence and supply” agreements, wherein a small party or independent MPs will “supply” their votes on bills and “confidence” votes in exchange for progress for their pet causes.

What does this mean for Brexit negotiations?

More trouble. Remember that May wanted to reinforce their numbers to improve her bargaining position with the EU and increase chances of a “good deal” for Britain. If you recall, she has said that “no deal is better than a bad deal.”

But with the Conservative Party not even getting majority, things just got a lot harder for May. Not only does she have to soften some of her stances (not all Tories are in favor of a hard Brexit), but she might have to scrap some of her plans altogether.

The lack of majority could also lead to delays in the Brexit negotiations. Formal talks was scheduled to start on June 19 but already EU’s Chief Brexit negotiator Michel Barnier tweeted:

“Brexit negotiations should start when UK is ready; timetable and EU positions are clear. Let’s put our minds together on striking a deal.”

Recall that Britain has already officially triggered Article 50 of the Lisbon Treaty. This means that they have two years to negotiate their way out of the EU. Tick tock.

Any other surprises?

As you can see on the chart above, Nicola Sturgeon’s Scottish National Party also lost bigly. More importantly, Alex Salmond – Sturgeon’s deputy, mentor, and a key SNP member, has lost his seat in Gordon.

This means that we won’t see a second Scottish referendum anytime soon. Already Sturgeon has shared that she would “properly think” about whether to press ahead with Referendum 2.0 after the Tories enjoyed their best performance in Scotland since 1983.

Nick Clegg, THE leader of the Lib Dems in 2010 and former Deputy Prime Minister, also lost his seat in Sheffield Hallam to Jared O’Hara of the Labour party. Yikes!

How did the markets react?

The pound took its hardest hit when exit polls – which have been good predictors of actual results – pointed to a hung parliament.

The currency also dropped by its sharpest since the EU referendum and made new lows while the final tallies were shaping up. However, it also saw retracements at the start of the London session.

FTSE 100, which includes companies that would profit from a weaker pound, opened higher today. Meanwhile, FTSE 250, which has more local companies, are marginally lower on the day.

It’s also interesting to note that utilities companies are among the biggest winners today. One possible reason is that the lack of majority would mean that the Labour Party won’t likely push through with nationalizing them while Theresa May can’t cap their bills either.

What now?

PM May revealed that she has seen the Queen and has formally asked permission to form a government.

Apparently, she’s now teaming up with the Democratic Unionist Party (DUP) to form a coalition in time for the start of Brexit negotiations AND the opening of the new Parliamentin 10 days.

Thing is, the DUP isn’t a fan of a “hard Brexit.” DUP founder Arlene Foster once shared that “No one wants to see a hard Brexit,” adding that “no one wants to see a hard border.”

This means that, unless May convinces Foster and her gang to come over to the “hard” side, then we’ll likely see a toned down version of May’s initial Brexit plans.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

 

UK OK ?

The U.K. could suffer another ratings downgrade after a General Election led to a hung parliament, Moritz Kraemer, sovereign chief ratings officer at S&P Global, said on Friday.

The U.K. lost its triple A rating after the country voted to leave the European Union in June of last year. S&P said at the time that it was worried the decision would lead to a deterioration of the U.K.’s economic performance and institutional framework.

Kraemer said on Friday that the latest election outcome proves the rating update was correct and further ones could be on the way.

“We have the outlook on the ratings still on negative indicating that further downgrade or downgrades could be in the wings going forward,” he said.

“This depends pretty much on the further outcome of the Brexit negotiations and the reality that the U.K. will face outside the EU, which is still uncertain,” Kraemer added.

Brexit talks, which were due to begin in a couple of weeks, are set to be delayed until the U.K. has a new government in place. The associated uncertainty could hurt the country’s economy by further derailing investment decisions.

Kramer noted that this was the second unnecessary referendum/election in the U.K. “This is quite a track record,” he said.

The upcoming decisions of U.K. lawmakers will be closely watched. Kathrin Muehlbronner, a Moody’s senior vice president and lead U.K. sovereign analyst, said via email: “Moody’s is monitoring the U.K.’s process of forming a new government and will assess the credit implications in due course.”

“As previously stated, the future path of the U.K. sovereign rating will be largely driven by two factors: first, the outcome of the U.K.’s negotiations on leaving the European Union and the implications this has for the country’s growth outlook; Second, fiscal developments, given the country’s fiscal deficit and rising public debt,” she added.

The outcome of the election also seemed to indicate that voters are tired of austerity policies.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Short Pound

The pound is heading lower whatever the outcome of the U.K.’s elections, according to BlueBay Asset Management.

While the currency has rallied since the election was called, BlueBay began selling sterling last week, betting that the U.K. is set for a damaging Brexit process after the vote. Such a view chimes with Allianz Global Investors who recently used the rally in the pound to short it, and the median forecast of analysts in a survey, who see the pound declining about 3 percent by the end of 2017.

“We’ve literally gone short the pound at the end of last week,” said Mark Dowding, a fund manager at BlueBay, which oversees $55.5 billion. “We think you’re going to be facing a Brexit that to us looks like it’s going to be a hard Brexit.”

The pound, which tumbled following the U.K.’s decision to leave the European Union last June, has pared some of those losses as investors speculate that the earlier vote will ease pressure on U.K. Prime Minister Theresa May. The Conservatives are currently expected to comfortably win the June 8 snap elections with a large majority in Parliament.

Sterling reached a nine-month high of 1.3048 on May 18, and was at $1.2971 as of 12:06 p.m. in London on Tuesday. Even after rallying 5 percent in 2017, sterling remains about 13 percent weaker since the Brexit vote last June.

“There’s been this optimism in markets that a really big majority may actually strengthen Theresa May’s hand and make life a lot easier,” said Dowding, who predicts sterling could retest $1.20 toward the end of the year — an 8 percent decline from the current levels. “I’m not really sure it will make too much difference in practice.”

Tough comments from both sides of the negotiating table signal a choppy path ahead. Bundesbank board member Andreas Dombret said Tuesday divorce proceedings would likely be hard or very hard. Those comments came shortly after Brexit Secretary David Davis said the U.K. will walk away from talks unless the bloc drops its high financial demands.

“The most significant point that we would make on the U.K. is that, based on our discussions around Westminster and our discussions around Brussels, it feels that the deal that U.K. politicians think they can achieve seems an unrealistic pipe dream,” Dowding said.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Le Pen Writes Off Euro

The euro will tumble to a 15-year low if Marine Le Pen becomes French President, with the immediate reaction in the currency similar to that seen in the pound following the U.K.’s Brexit vote, according to economists.

The shared currency would drop to $1 or below a day after a victory for the National Front leader, according to 23 of 38 respondents in a Bloomberg survey, with five of those calling for a decline below 95 U.S. cents. A Le Pen victory is seen causing such a rapid decline because the anti-European Union candidate has threatened to call a referendum on the euro and re-denominate the nation’s debt.

A decline to parity for the first time since 2002 would be a fall of more than 7 percent from the current level of about $1.08, while a move below 95 cents would represent a decline of around 12 percent. Such a move would mirror the reaction seen in the pound following the U.K.’s decision to leave the EU, and reinforce an emerging trend of currencies taking the strain for political upheaval.

In a similar survey before the Brexit referendum last year, the majority of economists forecast a drop below $1.35 in the event of a decision to leave, a call that was borne out after the vote as the pound slumped more than 10 percent to a 31-year low of $1.3229.

“The market reaction would be very negative since re-denomination risks have been priced in only to a very modest extent,” said Frederik Ducrozet, an economist at Banque Pictet & Cie in Geneva, who expects the euro to drop below parity after a Le Pen victory.

A Le Pen victory is seen as unlikely, with the economists surveyed assigning a 61 percent probability that independent candidate Emmanuel Macron will become the next president, compared with just 20 percent for Le Pen.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions.