Fra BNP Paribas – læs hele analysen her
Having suggested the Conservatives were heading for landslide victory, opinion polls now show a tighter race, albeit with Theresa May most likely to remain in office.
The policy differences between the two main parties, the Conservatives and Labour, are stark, reflecting a further move to the left for the Labour party under leader Jeremy Corbyn.
Labour plans a large increase in taxes and spending as a share of GDP that would result in a wider deficit than under a Conservative government.
There are also marked differences in the approach of the Conservative party and those of other parties to Brexit and immigration.
Labour favours retaining closer ties to the EU and the single market, while the Liberal Democrats and the Scottish National Party are campaigning to remain in the single market.
The Conservatives are the only party that aims to reduce net immigration to the UK, which is likely to mean accepting less complete access to the single market as part of any deal.
At present, both the currency and gilt yields continue to be weighed down by both political and economic uncertainty. A further narrowing in the polls could push both lower still.
Immediately after the election, we would expect the currency to recover some ground and gilt yields to rise from their year lows on the back of a solid Conservative majority.
In the short term, a Labour victory, particularly a coalition, would be most negative for the currency and yields, given the likely increase in uncertainty over the UK’s Brexit strategy.
Heading into the event we maintain medium-term bullish GBP and bearish UK rates recommendations.
A Conservative victory would see reduced uncertainty while a Labour-led government could see a softer approach to Brexit, higher tax policies and a lack of fiscal tightening.
Trades: Favour structures trading EURGBP downside to 0.80 and short 10y gilt ASW, targeting a 15bp cheapening. Summary With less than a week to go to polling day, the UK election has become a more interesting event than was expected when campaigning started in April.
The polls have moved against the incumbent Conservative party government. Although it still looks odds on to win a majority, the hopes it may have harboured of a landslide victory when Theresa May called the general election now look to have faded, with the Labour party making unexpected gains in the polls. This switch in momentum towards Labour, along with some polls already showing no singleparty will gain a majority, raises the risk that the UK could end up with a coalition government.
The policy differences between the two main parties, the Conservatives and Labour, are stark, reflecting a further move to the left for the Labour party under leader Jeremy Corbyn. Labour plans a large increase in taxes and spending as a share of GDP, which the Institute of Fiscal Studies judges is likely to lead to a wider deficit than under the Conservatives’ plans and is subject to greater risks of worse outcomes.
However, Labour’s plans do not imply that fiscal policy would, on average, be loosened during the next parliament; the deficit would be around 2.5% of GDP in 2021-2022, close to the 2016-2017 figure. Under the Conservatives, the IFS expects the deficit to drop below 1.0% of GDP by the end of the parliament. There are also marked differences in the approach of the Conservative party and those of other parties to Brexit and immigration.
Labour favours retaining closer ties to the EU and the single market, while the Liberal Democrats and the Scottish National Party are campaigning to remain in the single market. The Conservatives are the only party that aims to reduce net immigration to the UK, which is likely to mean accepting less complete access to the single market as part of any deal with the EU.
However, in terms of the market impact, the possibility of a more proEuropean approach under a Labour-led coalition has to be set against: (i) a potential lack of coherence under a three (or more) party coalition; (ii) higher taxation and public spending and a wider deficit; (iii) the risk that a coalition may fail to make it through the full five-year term; (iv) and the lack of ministerial experience in a government faced with the task of navigating the UK’s way out of the EU. All in all, we see a number of potential market moves post the election:
Moderate/large Conservative majority: Could see some renewed GBP strength and higher gilt yields, similar to the reaction following the announcement of the election.
Labour majority/Labour-led coalition/hung parliament outcome: Uncertainty will likely increase as the Brexit negotiating strategy may have to be redefined. This should put downward pressure on both the currency and gilt yields, at least initially. Higher inflation expectations from a weaker currency could limit any fall in yields though.
Over the medium term, as the Labour party favours a softer approach to Brexit than the Conservatives, this could prove sterling positive. Together with higher tax policies and fiscal promises, gilt yields could find some support and push higher over the medium term and see ASWs cheapen.
We continue to favour bullish GBP and bearish gilt positioning over the medium term, via structures trading EURGBP downside to 0.80 and short 10y gilt ASW, targeting a 15bp cheapening. (Please see pages 7-9 for more details). Split polls reflect methodological differences Since the last election in 2015, the polls have consistently forecast a Conservative party majority.
This was boosted following the EU referendum and increased further following Theresa May’s decision to call a snap general election in mid-April (Chart 1). Over the past week or so, however, the gap between the two major political parties has narrowed (in both the online and telephone polls).
The Labour party has made strong gains, taking support from the Conservatives and smaller parties. Theresa May’s lead has, therefore, ebbed, with the gap having closed from a high of around 20pp to less than 10pp now. The range of outcomes suggested by the polls, however, is wide. Some surveys show the Conservatives’ lead has fallen to as little as 3pp while others put it at 12pp. The variability of the polls in part reflects significant differences in the methodology used. Some pollsters, such as ComRes and ICM, are using voter-turnout models, which reflect the demographics seen at past general elections.
This method tends to produce a wider lead for the Conservatives, as its supporters are more likely to vote. Others companies, such as YouGov, base their outcomes on the respondent’s self-reported likelihood of voting.
This method tends to boost the Labour party, which attracts a younger demographic and previous non-voters, who in the past have been less likely to turn up on election day.
