For the last few weeks opinion polls consistently gave the Conservative party a fairly decent lead, with maybe the odd exception. So when tonight’s exit poll pointed to a 'hung parliament' it was certainly unexpected.
The plunge in the pound and the prospect that the Conservatives could struggle to form a majority government is likely to have significant consequences for the Brexit talks, which are due to start in a few days’ time, as well as raise serious questions as to how long Theresa May can survive as party leader, let alone prime minister.
As the current incumbents and the largest party, the Conservatives would have the first attempt at forming a minority government, but if they are unable to do so, then the task would then fall to the Labour party to try and do the same with the SNP, Liberal Democrats and possibly the Greens.
It is unlikely that there would be any coalition, given what happened to the Liberal Democrats in 2015, and as such the other parties would offer support probably in the form of a confidence and supply agreement.
Between 1977 and 1979 Jim Callaghan’s Labour party stayed in power thanks to a confidence and supply agreement with the Liberals, known as the Lib-Lab pact.
Weighing up the current arithmetic, if the Conservatives can’t get to 326 seats, or are unable to form a minority government, and Labour can, then we could well be heading back 40 years to the 1970s, only this time with the SNP and Liberal Democrats holding the cards.
What this means for Brexit talks is difficult to say given the clock is already ticking, but as the SNP and Lib Dems want to stay in the single market, the odds are rising that Brexit may well not happen. Labour has said it wants to stay in the single market while ending freedom of movement, a position that the EU are unlikely to accept.
Not surprisingly given this unexpected outcome, the pound has plunged, briefly dropping below 1.2700, and while some have argued that a softer Brexit might ameliorate the downside, there is still the prospect of the contents of the Labour party manifesto for markets to consider.
If Labour do manage to form a minority government there is the question of how much of it will they be able to implement, in the form of their nationalisation programme, as well as their plans for raising taxes, implementing a financial transaction tax, and increasing regulation on the financial sector.
This could well see the pound come under further pressure as well as having consequences for the FTSE 100 and FTSE 250 when European markets open later today, as investors weigh up the consequences of a possible Labour minority government, and its manifesto pledges.
Heightened market volatility is likely over the election period, which could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.
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