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How will Different Election Outcomes Affect the Markets?

Today is a big day for the market with three major events upcoming: the market-focused UK general election, the Former FBI Director Comey’s testimony, and ECB’s rate decision and press conference at 12:45 and 13:30 BST respectively. The market is expected to be volatile across the board.

In terms of the UK general election, there are 650 seats in total in the House of Commons. To become a majority, a party must win more than half of the 650 seats, which is at least 326 seats. Be aware that the result of the general election outcome will cause volatility to GBP crosses and gold prices.

There will be four possible outcomes :

1. The Conservatives wins more than 350 seats (absolute majority)

The Conservative Party will have more control of the Parliament and reduce the level of opposition from other parties. The UK will be at a stronger position negotiating with the EU under Theresa May’s lead. The result will likely ease market concerns over uncertain UK prospect during the Brexit process to an extent, and hence lifting GBP.

2. The Conservatives wins 326 – 349 seats (narrow majority)

Currently the Tories have 330 seats in the House of Commons. The reason behind the snap election decision was to increase the Conservatives’ dominance in Parliament. If the outcome turns out to be that the Tories narrow majority remains unchanged it will likely result in market disappointment and weigh on GBP. Nevertheless, if the Tories win 340 – 349 seats, markets disappointment is likely to be comparatively moderate.

3. The Conservatives and the Labour both win less than 326 seats
(the Tories lose majority, no majority in the Parliament )

If the Tories win less than 326 seats they will lose their current majority in Parliament and this will likely lead to significant market disappointment and a GBP sell-off.

If none of the parties win a majority (326 seats), the Tory and Labour Parties will likely unite with other smaller parties and make a joint government. In this situation, potential hurdles and disagreements caused by the lack of a majority in the Parliament will likely result in the impending 2-year Brexit negotiation process being difficult and weighing on GBP’s prospects.

4. Labour win more than 326 seats
(Labour replaces the Tories becoming a majority)

The situation seems to be unlikely to happen, however, not impossible. This will likely shock the market resulting in an initial sell-off in GBP. In addition, market concerns over Corbyn’s soft stance on negotiating with the EU, will also likely weigh on GBP.

Although a weak GBP is likely to boost UK equities, with Labour’s manifesto to raise corporate tax rates this will weigh on UK equities.

To date GBP has been relatively stable ahead of the UK election with the market expecting a Tory win. However, market will likely react differently from a decent victory to a modest win after the release of the election outcome.

This morning, in the early European session, GBP/USD edged up and is currently trading in a range between 1.2950 – 1.2980. EUR/GBP broke through the psychological level at 0.8700 yesterday and is currently trading around 0.8675. GBP/JPY edged up and is holding above the psychological level at 142.00, currently trading around 142.35.

The FTSE 100 index broke through a significant support line at 7500 on Wednesday indicating increased selling pressure. It is currently trading around 7470.



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