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What The UK Brexit Election Means For The Stock Markets, Boris Johnson

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The ongoing political uncertainty in the U.K. is having an impact on the stock market.

The upcoming general election Dec. 12 is expected to send further jitters across FX markets, which could impact the pound sterling and trigger sharp moves, according to analysts.

Prime Minister Boris Johnson pushed for a general election, saying he wanted "to be reasonable with parliament" and giving MPs more time to scrutinize his Brexit withdrawal deal.

Since the 1920s, the two dominant parties in the U.K. have been the Conservative Party and the Labour Party.

UK Labour Campaign Impact

Last week, Vodafone Group Plc (NASDAQ: VOD) felt the impact, with shares declining after Jeremy Corbyn, leader of the Labour Party, revealed plans to nationalize British Telecom's Openreach broadband network and provide free internet if the party wins power.

The elections add another layer of uncertainty to U.K. assets, with global investors already contending with the risks surrounding U.S.-China trade talks and a backdrop of slowing global growth, said Han Tan, an FXTM market analyst.

"Once this major uncertainty is lifted, the U.K. election outcome is likely to trigger sharp moves in the stock market. Still, it remains to be seen whether the incoming political representation can ultimately break the Brexit impasse within the U.K. parliament. The Brexit conundrum remains the foremost concern for global investors when sizing up UK assets."

How The UK Election Could Affect The Sterling

A Conservative victory seems to have largely been priced in, and the odds of a substantial majority are rising, said Marc-André Fongern, an FX and macro strategist at MAF Global Forex.

The pound sterling’s solid performance in recent weeks is a “logical consequence,” and the key risk for the sterling would be a Labour Party triumph, as Jeremy Corbyn's policy reforms are likely to be counterproductive to Britain's economy, Fongern said.

“Although the British pound continues to be rather undervalued, exuberant optimism would be misplaced as numerous challenges remain, such as the trade negotiations with the EU.”

Labour Vs. Conservatives

Samuel Tombs, the chief U.K. economist at Pantheon Macroeconomics, said he still views the election as close to a toss-up between a Conservative majority and a hung Parliament, in which the Tories are only able to govern with the support of the Democratic Unionist Party or the Brexit party.

“As for markets, sterling should recover in the event of a Tory [Conservative] majority, though the margin will matter. A small Tory majority could lead to a renewed Brexit logjam, or potentially a no-deal Brexit at the end of the transition period in December 2020,” Tombs said.

These risks would be heightened in the event of a hung parliament, likely pushing the sterling down to $1.25 in such a scenario, he said.

The key potential turning points this week include the TV debate in the U.K. between Johnson and Corbyn and the publication of the main parties' manifestos over the course of the week.

“Notably, Mr. Corbyn only gained ground on the Tories in the last three weeks of the 2017 election campaign,” Tombs said.

Price Action

The iShares MSCI United Kingdom Index (NYSE: EWU) was trading 0.39% higher at the time of publication Wednesday, while the Vanguard FTSE Europe ETF (NYSE: VGK) was down slightly.

Related Links:

UK GDP: Economy Avoids Recession Despite Weak Growth

Chinese Firm Jingye Buys British Steel, Plans $1.54B Investment


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