Having learned its lesson that both an “unexpected” result (in the case of Brexit and Trump), and a “priced in”, favorable election outcome both lead to higher risk prices, the market no longer even pretends to be nervous about the outcome of this Thursday’s general election in the UK.
To be sure, it has good reason for that: despite fluctuating polls, virtually every analyst’s base case for this election remains a Conservative majority large enough to allow for the necessary compromises to deliver an orderly “hard Brexit” with a transition period lasting 1-2y. However, as shown in the chart below, a recent narrowing of the polls poses risks to this scenario.
In terms of election outcome, the extent of the Conservative majority matters most for Brexit risks; a less than 60 seats increases the risks of the UK walking away from Brexit negotiations according to BofA. On the other hand, a larger conservative majority increases the likelihood of securing transitional arrangements and fully implementing Brexit; a larger majority should enable Prime Minister May increased flexibility to compromise with the EU-27, despite opposition from the Eurosceptics within her own party.
Alternatively, while a Labour-led coalition or outright victory has the potential to lead to a softer Brexit, analysts are worried about growth risks posed by some of the policies put forward in their agenda.
This post was published at Zero Hedge on Jun 5, 2017.