UK election sends pound higher
The FT’s Roger Blitz and Kate Allen explain the reasons behind the pound’s gains following Theresa May’s call for a snap election on June 8. As the Conservative party aims for a wider majority, a softer Brexit position appears likely.
Produced and filmed by Petros Gioumpasis.
Investors have been caught by surprise by Theresa May's surprise announcement that she wants to hold a snap general election on June 8. With me to discuss the implications of this for investors is Kate Allen, the FT's capital markets reporter. Kate, first of all, what was the initial reaction from the markets when Downing Street announced that she was going to make this surprise statements?
When it emerged this morning that Theresa May was going to be making a statement about something, people became very concerned, and we saw uncertainty rising in the markets, jitters as people were wondering what this could be. It wasn't clear. However, when she came out and said she's calling a general election, actually this became interpreted as a reassuring move in the sense that it was interpreted as giving a greater chance of soft Brexit.
Right. Here is how that reaction has happened today. That was sterling falling initially from Downing Street making the announcement, and there it goes upwards. And there's a similar story about how gilts reacted on the 10-years.
Yes, indeed. Gilts also dipped sharply but then regained all of that dip and even a little bit more, I think, as well ticking upwards as investors predicted a more stable political outcome as a consequence.
Now, Kate, you've been spending the last two years in the lobby as a political reporter, so you can tell us exactly why you think investors are suddenly talking up the idea of a softer Brexit on the horizon. Why is that?
It all comes down to the internal dynamics of the Conservative Party. Now, with a majority of just 17, Theresa May has a real problem on her hands that there is a hardcore, relatively small but still significant in the Conservative Party, of passionate, longstanding, hardcore eurosceptics who want to see the hardest Brexit possible. Now, with a majority of just 17, they are in a position to effectively hold Mrs. May slightly to ransom. The extent to which they have an influence over the Brexit process has become obvious in recent months.
An election can neutralise that if she gets a bigger majority, is that right?
Exactly. So the polls suggest she is running far, far ahead of Labour, 20 points in some polls, in a position to really generate a substantial majority, maybe 70, 50, 70 seats. Now, in a Conservative Party at Westminster looking like that, the eurosceptics would be politically to some degree irrelevant.
The thing is, investors have always worried about a snap election. They don't like the uncertainty. So there is going to be this uncertainty, but she's played a pretty good hand this year, has she not? And therefore investors feel a bit more comfortable with Theresa May at the helm?
Yes, I think you can see her performance since the referendum and since she became prime minister as a game of two halves. The first was a certain naivety perhaps about how the markets react and how to schedule political announcements in a way that resists provoking anxiety and uncertainty in the market. And since particularly the start of the year, through the process of the Article 50 bill, we've seen people become much more reassured about her ability to steer these controversial issues through Parliament.
And this is how sterling has been going since the start of the year. That was actually, in January, that was a bad moment for her. Still a lot of uncertainty about her Brexit stance, but then she did that very strong Lancaster House speech, and that is Article 50 then talking up sterling. So we're having another moment like this.
Exactly, exactly. So we can see here, as you say, in advance of the Lancaster House speech, there is some uncertainty. And while the Brexit bill was passing through, particularly the House of Lords where it looked like there could be some standoff between the government and peers over the Article 50 bill, we see these dips. But in both cases they recover as she manages to deliver on what people were hoping for.
OK, so hurdles for Theresa May and for investors. Tomorrow, she's trying to get this bill through in order to call this snap general election. Is that a problem? Is she going to get through that?
Yes, this is a very unusual situation because, of course, we now have what's called the Fixed Term Parliaments Act, which means that we're not supposed to have a general election until 2020 unless 2/3 of MPs vote for it. So Mrs. May tomorrow needs 2/3 of MPs to vote for it. However, it's very difficult for an opposition party to vote against a general election at the best of times because, why wouldn't you want to put your message to the people? So, it's fairly likely that she will get that through without a problem
That's one hurdle. Now, the election campaign could be another hurdle. What's the possibility there?
Yes. So the key issue that she needs to avoid here is turning this into a rerun of the referendum and potentially uniting opposition parties in some kind of pro-remain pact or coalition or even a less formal form of cooperation, which could potentially prove damaging. There's also the issue that it's likely she will lose some Conservative seats in remain areas, particularly to the Liberal Democrats in places like South West of England. Now, if she fails to take enough Labour seats in areas like the north of England to make up for that, she could end up back where she started with no better majority than she's got now.
Here's our final chart. This is sterling since referendum, that initial shock, another shock towards the back end of 2016, but fairly consistent. What's your best guess in terms of the election outcome about how investors will feel come June the 9th?
I think they probably will feel reassured because it's very hard to see a scenario, even if she does lose some seats to the Lib Dems, it's very hard to see a scenario in which Labour make much hay at all. In fact, they will take substantial losses. So, I think an increased Tory majority of some form is the most likely outcome. Whether it's sufficient to outweigh the eurosceptics, however, is going to be the crucial question.
Sterling, forever a political currency. Kate Allen, thank you very much.