Spread betting (in the UK & Ireland) and contracts for difference (CFDs) can be a useful tool for trading general election results. Spread bets and CFDs give traders leveraged access to trading on major indices and currencies, which tend to react swiftly to big national-level developments like elections.
While monitoring and trading on affected markets during the election campaigns can be worthwhile, the advantages of spread betting and CFD trading can be especially evident during election nights. Unlike stocks and exchange traded funds for instance, forex pairs and some indices can be traded around the clock on weekdays, and are not limited to exchange hours.
On election nights, this means that traders can attempt to take advantage of moves in the market in the evening after official polls close at 10pm and as exit polls are released, as well as overnight when the official results start to come in, and again in the early morning hours when the final results are out.
As 24-hour trading means that markets are open throughout the counting period, the risk of gapping is lower when spread betting and trading CFDs, relative to exchange-traded instruments.
The UK election: an evolving scenario
The UK general election takes place on Thursday 12 December, with the government looking for a stronger mandate to support its goal of pushing through Brexit and leaving the European Union. UK prime minister Boris Johnson’s aim is for voters to deliver a commanding Tory majority, which would give him the opportunity to bring an end to what he describes as “unrelenting parliamentary obstructionism”.
The Conservative party are currently leading by a fairly decent margin in the polls, but a lot can change over the course of a campaign, and there is still potential for significant market action around the results.
Since the vote was called, anticipation that the result will enable the government to push through the withdrawal agreement by the end of January next year has seen the pound hold on to the gains we’ve seen since the September lows, particularly against the US dollar, euro and Japanese yen.
The FTSE 100 which has had a tendency to trade lower when the pound has been strong since the 2016 Brexit vote, but has also seen some decent gains over the same period, hitting a three-month high in the middle of November.
Potential national impact on the FTSE and UK stocks
The election result may spark a re-evaluation in stocks, but the effect of the election outcome on Brexit is unclear, as parliament could be as divided as the previous one. If Labour, the Scottish National Party and Greens, who are all in favour of a second referendum – or the Liberal Democrats, who have pledged to cancel Brexit altogether – make significant gains, the Conservatives could face further frustration and turmoil in Westminster. However, the Brexit party’s decision to stand to stand aside in Tory-held seats is a boost for Mr Johnson, as it reduces the risk of splitting the Eurosceptic vote.
So far, strong polling numbers for the Conservatives have helped keep a floor under the pound as well as the FTSE 100 and FTSE 250. If the poll leads for the Conservatives are maintained in the lead-up to polling day, the market may price in much of the result ahead of time. If Labour or the Liberal Democrats look as if they might pick up more seats than expected, it could see sterling as well as the FTSE 100 start to slip back.
Possible regional effect on the FTSE and UK stocks
With Labour seemingly struggling in the polls, there could well be a repeat of 2017, where the SNP consolidates its hold over Scotland’s representation, while other regional parties in Northern Ireland and Wales might also see some increase in support. Support for the SNP could have a significant impact on markets following the election, because of the party’s desire for a second independence referendum.
If the Conservatives are able to pick up seats, particularly in Scotland, and also win a majority, then the SNP’s desire for another referendum could find itself stranded at the starting gate.
A positive outcome in terms of a Conservative majority would be seen by investors as the least market-unfriendly option of those available, and may see the pound gain, along with UK stocks, a lot of which are trading at a discount due to concerns about nationalisation, and other prospective business-unfriendly policies.
UK election and the forex markets
Some of the sterling-related FX pairs which could be most active around the election include:
Cable is the most actively-traded sterling pair and was extremely volatile around the 2016 Brexit referendum. The pound does appear to be building some form of base and could see a move towards $1.4000 in the aftermath of a solid Conservative win.
With Brexit the core issue of the current campaign, the channel-cross is likely to be extremely active on the election result, with the prevailing momentum currently favouring further euro losses.
GBP/JPY & GBP/CHF
The election could have a big impact on how sterling trades relative to traditional risk-havens like the Japanese yen and Swiss franc. In the last three months the pound has made good gains against these haven currencies, as the prospect of a no-deal Brexit has receded. Traders also appear to be starting to price in a win for the Conservatives, while a different result could spark a significant reversal.
Potential gold trading examples
The UK election result may also have a more general impact on risk sentiment and tolerance in world markets. This may particularly impact trading in GBP relative to gold, the world’s premier hard currency.
To capture the performance in sterling relative to gold, a trader can use two contracts, GBP/USD and Gold (XAU/USD), going long one and short the other to mimic the performance.
For example if a trader thinks gold could outperform sterling, they could:
Go short on GBP/USD = Sell sterling while buying USD
Go long on Gold (XAU/USD) = Buy Gold while selling USD
The two USD returns cancel each other out, giving a trader the combined performance of being short sterling and long gold.
On the other hand, a trader backing sterling to outperform gold, could do the following:
Go long on GBP/USD = Buying sterling while selling USD
Go short Gold (XAU/USD) = Selling Gold while buying USD
The two USD returns cancel each other out, giving a trader the combined performance of being long sterling and short gold.