The FT's Jonathan Eley looks at the British pound and the FTSE index in view of the recently announced UK snap election. While the move might bring volatility in the short term, the long term outcome could be positive
Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.
Theresa May, Britain's prime minister, unexpectedly called a general election today. And here's how the markets reacted. The pound went up a lot and shares fell.
The pound rose, because Mrs. May is expected to win a bigger majority in parliament, giving her more authority to pursue Brexit talks according to her own agenda. The stock market fell, because, well, ever since the referendum that has been the pattern. When the pound goes down shares rise and vice versa.
Stocks represented here by the domestically focused FTSE 250 index often fall during election campaigns. In three of the past five general elections, they have done so. But they went on to post gains after the elections were over. Sometimes that was related to currency weakness, most obviously in 1992, when the pound was kicked out of the exchange rate mechanism, but not always.
In both 1997 and 2005, the pound and the mid-caps both rallied after the election. What will happen this time? Well, sterling is unlikely to suffer a repeat of the 1992 debacle. If anything, elections in France and Germany and the relative unpredictability of US policy are likely to support the pound.
Can stocks rally despite this? Perhaps. Mrs. May, as well as getting the opportunity to pursue her own version of Brexit, will get the chance to reset the domestic agenda too.
She seems to favour less austerity and less restrictive policies than her predecessors. She's a more centrist prime minister. If she follows through on that, that could prolong consumption and growth in the UK. And that would benefit both shares and the pound.