Fundamental Analysis

Fundamental Report 07/06/2017

• July 18, 2017

THE U.K. GENERAL ELECTION 

Markets, most specifically, Sterling rates are anticipating one of the most pivotal elections in recent history. After the U.K. decided to withdraw membership to Europe last year, there has been much contention over how the process of withdrawal should look, with the current Prime Minister, Theresa May, affirming “Brexit means Brexit.” With British citizens two days away from deciding who will steer this process and domestic issues; the race for leadership appears closer than May had originally anticipated. If the public is to believe the polls, the opposition party fronted by Jeremy Corbyn, has clawed back a 17 point lead to 1 point according to the Survation poll and 6 points according to a YouGov poll. Clearly, at this point, the result is uncertain and the decision to have a snap election was a ‘u-turn’ for the current Prime Minster whose popularity has diminished after reneging several times on policies as a result of negative backlash. May’s thinking behind the early election, which was scheduled for 2020, was focussed on reducing the uncertainty surrounding the Brexit process, with a win for the Conservatives cementing the prospect of a ‘hard’ Brexit. What does a ‘hard’ Brexit mean? This definition would require the U.K. to completely reject full access to the single market and customs union with the European Union, which may result in tariffs on goods and services. This results in full border control, full control over the negotiation process on trade deals and the creation of domestic policies. Voters who elected to remain in the U.K. would prefer a ‘soft’ Brexit which would see similar arrangements to the current policies governed by the E.U. This would result in U.K. no longer having a seat in the European Parliament however, there would be free passporting of goods and services and non-tariffed trade. It is important to point out, however, that any terms of the agreement in Brexit would be subject to negotiation and are not as simple as the terms listed. Has the rising political risk affected the currency markets? The pound has risen almost 5% against the dollar, year-to-date, however, this mainly indicates extended weakness in the dollar as opposed to Sterling strength. Perhaps surprisingly, the Euro has gained strength over the pound, achieving a 4% appreciation against the pound in the last month alone. The FTSE 100 has hit a recent high at 7,598 amid apparent weakness in the pound, with the 7500 level providing some support in a slow uptrend. If May wins the election, markets may view the result as positive given that there is a clearer plan for Brexit negotiations and perhaps more public confidence in May’s ability to manage the process. No major directional moves are expected ahead of the election on Thursday 8^th June.