Despite the suggestion that this was to be one of the closest elections in a generation, UK stock markets and the pound have been relatively stable so far this year as the election campaign gathered pace.
Before today, the FTSE 100 was up around 5% since the start of 2015, a similar return to that of a basket of other global stock markets. As relates to currency, at the start of the year one pound bought you US$1.55 relative to $1.52 yesterday. It has been a different story relative to the euro, but that currency has been very weak this year against all currencies.
The moves in sterling overnight to the 1.54 level, and the follow-through in the stock and gilt markets, have produced a sigh of relief from investors that the threat of a dysfunctional government has dissipated. According to Bloomberg, the pound has witnessed its biggest move since March 2009. Over the last few weeks, the volatility of the pound had picked up markedly. In other words, the extremes in the perceived value of a pound by investors were up at levels not seen since 2009 – and more so than at the time of the last election in 2010.
While the Conservatives’ projected slim majority bodes well for the trajectory of UK borrowing and ongoing fiscal stability, it will make for a fragile government and one that, at times, will likely be constrained by the extremes from within. Moreover, huge constitutional questions have been asked by the electorate and will need to be addressed – some before others.
It seems impossible to think that a Prime Minister who has spoken of both "English votes for English laws", and of reclaiming the One Nation crown, will not move quickly to reflect the strength of the Scottish Nationalist Party's showing north of the border with further fiscal autonomy, or more devolved powers.
And then of course there is Europe. A stronger result from the UK Independence Party (UKIP) might have pushed the UK closer to the exit, or at least closer to a vote on it. However, with the UK's parliamentary first-past-the-post system impeding UKIP’s ability to turn votes into parliamentary representation, David Cameron and his likely slender parliamentary majority will now have the opportunity to negotiate for change and seek the opinion of the UK population on their own timetable.
This result is better than financial markets, or indeed betting markets, dared to believe. It answers many questions. But it asks quite a few too. And markets by their nature are forward-looking.
Attention is going to move very swiftly to focus on the UK's role in Europe – which will have far-reaching consequences for the UK economy, its stock market, its bond market, and its currency.
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