Zurich / London – Greetings from Piccadilly where, not far away, Theresa May has just announced a general election in the UK to occur on 8 June. This will be a surprise to Westminster watchers and, to a degree, to markets.
Our sense is that the motivating factor behind this is to give Theresa May and her Brexit-focused cabinet a popular mandate that will allow her to pursue her own set of policies, in her own style and ethos. Notably, her aim is to take advantage of polls that show a strong lead for the Tories over Labour and, equally, disarray in the Labour Party. Theresa May needs a somewhat larger majority in the Commons in order to pass the eventual Brexit legislation. The election will also allow May to take advantage of a much weakened UKIP.
There is also the aim of strengthening the hand of Theresa May as the Brexit negotiations begin in earnest in June and removing the potential ‘distraction’ of an election in 2020 as the Brexit process becomes intense.
Politically, there are several risks: First, that the ‘Remainers’ organize themselves, either within the Tory Party or around another party such as the Liberal Democrats, and deliver a riposte to Theresa May. Equally, a new ‘Remain’ party might spring up. Second, there is a risk that a poor showing by Labour will lead to the departure of Jeremy Corbyn and that he is replaced by a more effective leader – Keir Starmer is a name that crops up. Third, people in Scotland may see the election as a ‘pre’-vote on Scottish independence, and another strong showing for the Scottish National Party may presage full Scottish independence down the line.
From a markets point of view, there are a couple of implications. First, with respect to sterling, this may unsettle the recent rally, but I expect that polls will guide towards a Tory victory and that will prove sterling supportive, as markets price a ‘better hand’ for Theresa May in the Brexit process. Second, more broadly – with the Turkish referendum last weekend, the French presidential election about to happen, geopolitical risk rising – this may cause markets to focus more on politics than the business cycle, which has been the driver so far. Finally, we have recently taken profits on our positive Gilt view, and this morning’s strength is another opportunity to do so. (Credit Suisse/mc/ps)