LONDON (Reuters) – Britain’s election on Thursday is widely referred to as the most important in a generation given the impact it will have on the country leaving the European Union and choosing between starkly opposed economic paths.
FILE PHOTO: A broker looks at financial information on computer screens on the IG Index trading floor in London, Britain February 6, 2018. REUTERS/Simon Dawson
As such, its outcome is expected to have both a strong short-term impact on trading floors but also a long lasting structural influence on UK financial asset classes, be it sterling, government bonds or stocks.
Investors have so far been pricing in an outright majority for Prime Minister Boris Johnson’s Conservative Party.
The assumption that such an outcome would end Brexit uncertainty and rule out Labour’s radical agenda has boosted the pound GBP= to a seven-month high against the U.S. dollar and lifted London’s mid-cap stocks .FTMC to levels unseen for over a year during most of the campaign.
A closely watched forecast released on Tuesday evening has however sent jitters across the markets, denting sterling and domestic stocks. It showed the race tightened and that Johnson was likely to win only a modest majority.
“At the moment, I still think Conservative majority is the most likely option and despite the reduction in sterling, that does still seem to be the option that markets are still pricing in,” said Rachel Winter, associate investment director at Killik & Co.
“But having said that, I don’t think anyone will be surprised to see a hung parliament.”
Following are a number of scenarios for British stocks, sterling and bonds based on some of the possible electoral outcomes:
BORIS JOHNSON GETS A LARGE ABSOLUTE MAJORITY
This scenario is considered to be the most market friendly.