Commenting on market reaction to a UK general election being called on the 12th December, Olivier Konzeoue, FX Sales Trader at Saxo Markets, said: “Market reaction was rather muted although GBP reacted positively and the FTSE currently trades heavy – Sterling’s relative strength being one of the factors. The prospect of a snap election represents progress and it increases the chances of a Brexit deal being passed by January 31st BUT Brexit remains unresolved and will be the main topic of a campaign that will very much look like a second referendum.
“PM Johnson will try and fend off the Brexit Party by portraying himself as the ‘Champion of Brexit’ and seek a clear mandate. Current surveys suggest he could succeed. We could see the Lib Dems, SNP and Labour form a soft Brexit coalition and still end up with a hung parliament and/or a surge of Brexit altogether. We all know election outcomes are unpredictable and therefore carry a risk markets cannot ignore.
“For markets, what matters is more time will pass before the latest version of the Brexit deal can go through the parliamentary process. From a macro stand point, a snap election means more time will pass before the UK can focus on economic matters and implement expansionary measures. Credit impulse would slow UK growth down through to the end of Q1 2020. No doubt this would weigh on GBP mid-term as would the risk implied by a general election. Cable is mildly higher as the general election was voted and the upside looks limited until the campaign really kicks in and all parties show their hand. Headline risk will be king and sterling is destined to trade sideways for the time being.
“FTSE companies such as retailers and exporters could come under pressure. These businesses need the withdrawal agreement to be put in place as any extension proves costly – impairing their profitability. Investment plans would have to be delayed yet again and export contracts on hold whilst retailers could see their revenues hit during the crucial Christmas sales period. The banking and insurance sectors will welcome any progress.”