Pound jumps and shares fall following UK election call

This morning’s decision by the UK prime minister Theresa May to call a snap general election in June caught many in financial markets by surprise but market reaction has so far been muted.

By 12.30pm sterling had risen almost 1% against the dollar and 0.5% against the euro while on the stock market, the benchmark FTSE 100 share index was down 1.6% at 7,212.

Aberdeen Asset Management investment manager Luke Bartholomew said the election was unexpected as the government itself had ruled out an election before 2020 out barely four weeks ago.

“Theresa May has clearly smelt an opportunity to consolidate her mandate ahead of the Brexit negotiations,” he said.

“Sterling sold off initially and has now come back. But it will take investors some time to digest the effects of the election in the next few days.

“A big factor for them is whether the election will make a softer stance on the Brexit negotiations more likely.

“The election should hand Theresa May a much bigger mandate to stand up to the harder line, anti-EU backbenchers which currently hold a disproportionate sway over her party’s stance on Brexit.

“That would be welcomed by financial markets. There’s also a decent chance of some volatility now with imminent elections in both the UK and France.”

Pimco’s head of sterling portfolio management Mike Amey said: “Theresa May’s decision to call a snap election is not without risk, but given a 20 point lead in the polls the Conservatives should be able to materially increase their working majority in Parliament.

“That in turn would give the government more room for manoeuvre during the Brexit negotiations, and make the government less exposed to the more right wing factions within the party.

“All else being equal that should lower the risk of a very disruptive Brexit as the government should be able to plot a less confrontational exit from the European Union.

“Whilst the initial market reaction has been muted this should reduce the risk premium in UK assets and put upwards pressure on UK gilt yields and potentially support the British pound.”

©2017 funds europe

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