SYDNEY, 9 June 2017:
Sterling spiralled lower today as British elections left no single party with a clear claim to power, sideswiping investors who had already weathered major risk events in the US and Europe.
With the majority of seats counted in the snap vote, British prime minister Theresa May had no way to win an outright majority in parliament.
The shock outcome saw the pound shed 2% on fears the political turmoil could delay and confound talks on leaving the EU, which are due to start in less than two weeks.
“This is messy for the UK economy and its Brexit negotiations and hence is a negative for the pound and share market,” said Shane Oliver, chief economist at AMP.
“But the UK is just 2.5% of world GDP and it’s hard to see significant implications for global investment markets.”
The rot started when an exit poll showed the ruling Conservatives could fail to win a clear majority when markets had expected a handy victory.
The BBC forecast the Conservatives would hold a reduced 318 seats in the 650-member parliament, following a big swing to the left-leaning opposition Labour Party.
Betting agencies were already taking wagers on whether May would still have her job by the end of the day.
“At this stage, there is no obvious way a formal, stable coalition government can be constructed, and therefore there is a high likelihood of a potentially prolonged period of uncertainty over who will be prime minister,” said John Wraith, a strategist at UBS.
Yet he cautioned bears against chasing the pound much lower from here.
“Today’s result will in part be seen as a vote against a definitive break from the EU, and the market may soon begin to reassess the probability of a so-called ‘hard Brexit’.”
Overnight, Wall Street had seemingly judged the testimony of former FBI director James Comey was not life-threatening to the administration of President Donald Trump.
Comey accused Trump of firing him to try to undermine the investigation into possible collusion by his campaign team with Russia’s alleged efforts to influence the 2016 election.
“I think the market is taking less of an alarmist review of this situation because there is no smoking gun here,” said Jefferies & Co money market economist Thomas Simons.
“So it’s not particularly impactful for thinking about… Trump’s economic agenda to go through.”