Watch out 2016, 2017 is challenging you for being the year of the political surprise. Now Britain is going to the polls, less than one year after the Brexit move to leave the European Union.
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A 20 point poll lead was just too compelling for UK Prime Minister Theresa May, who after all is the consummate politician. Her legacy rests solely on a successful Brexit and now she wants the mandate to achieve that.
The Conservative government’s slender working majority of 17 has been a bugbear. It’s also been subjected to road blocks in the upper house and its powers to delay legislation, where they are in a minority. With 51 days to go until 8 June, May has hopes of securing a commanding House of Commons majority after a new election.
That should be good for the pound, the most sensitive barometer of Brexit—a stable government with a strong mandate going into negotiations with the EU makes for a benign environment.
Gilts held onto their recent strength, with 10-year yields briefly falling below 1%, though this is more about following US Treasury and German bund yields lower. They may look overpriced, but they are not alone in the bond world for that.
For these markets, the moves after May’s announcement weren’t big ones, in the grand scheme of things—you’d never have guessed a general election was on the way. The FTSE was harder hit, as stronger sterling bodes poorly for overseas earnings. Overall, volatility should be minimal until Parliament votes on Wednesday. It looks like May will carry the day, given that the Labour Party’s signalled its support.
Markets clearly prefer the future stability of a determined UK approach to the most important political issue of leaving the EU. Nonetheless, what will really drive investment valuations is how successful the Brexit outcome is for the UK economy than how large the government’s majority might be. Bloomberg