UK Politics: Polls point to Conservative majority… – The UK election campaign moved into a higher gear last night, with the first televised debate between the two main party leaders. A YouGov snap opinion poll suggested voters were split down the middle on who won the debate, with 51% favouring Conservative leader Boris Johnson, and 49% favouring Labour leader Jeremy Corbyn. Taking a step back, the Conservatives still lead in the opinion polls by c.10 points, with support for both main parties leaking back from the smaller parties in the past few weeks. This would suggest a Conservative majority in parliament, and indeed betting markets imply a 69% probability of such an outcome as of today, with a 34% probability of another hung parliament, and only a 4% probability of a Labour majority.
…which would be positive for sterling in the near-term – The most important development underpinning sterling strength of late has been the reduction in the risk of a no-deal, disorderly Brexit. With the Conservatives campaigning on the basis of their deal, and the next two most popular parties (Labour and Liberal Democrats) in favour of either a soft Brexit or Remain, there is no obvious path now to a disorderly Brexit. Assuming the Conservatives do win a majority, we expect this to be a further positive for GBP, as it means both reduced political uncertainty as well as Brexit uncertainty. Assuming another hung parliament, we expect this to lead to another referendum with Remain winning – even more of a sterling positive – though the path to this would be bumpier, with near-term weakness likely.
Might markets be underestimating the risks? While a Conservative majority might provide near-term support for sterling, GBP would likely be weighed later in 2020 by the risk that the government does not extend the Brexit transition period beyond end-2020. We also think markets might be underestimating the risk of another hung parliament, for two reasons: 1) the Conservatives had a similar poll lead at this stage in the 2017 general election, but ultimately lost much of that lead in the course of the campaign – this could yet happen again, with the election still nearly a month away on 12 December; 2) the UK’s first-past-the-post electoral system complicates predictions of parliamentary seat share, as the number of seats won depends on how votes are distributed regionally. In other words, the Conservatives could still end up without a majority even if they got the highest vote share.
Labour majority looks unlikely, but could be negative for markets – The main risk scenario for financial markets in the election is a Labour majority, which on present polling looks unlikely. This may seem counter-intuitive, given that Labour favours a closer relationship with (if not remaining in) the EU. However, Labour would have much more freedom to implement its radical leftwing agenda, including renationalising parts of the economy that had been privatised (such as the railways), and immediately raising the minimum wage by over 20%. This would likely have a negative impact on financial markets and business confidence, even if such policies could also prove to be stimulatory to growth and inflation. (Bill Diviney and Georgette Boele)