After a fascinating and absorbing election campaign, the UK gets to vote on their future Prime Minister, political party and Brexit negotiator for the next five years. The surprise snap election called by PM May seven weeks ago on expectations of a landslide victory has been anything but a victorious lap around the country. Labour and Jeremy Corbyn especially, have run an unexpectedly confident campaign and May’s seizing of the (election) day has been increasingly called into question the longer the campaign has gone on.
Of course, the polls have narrowed over the past few weeks and talk of a hung parliament has gained some traction. With this, the options markets have followed this narrowing too and 1 week Implied Volatility in GBP has doubled to 14% with demand for GBP downside protection driving much of this activity. We also note that trade-weighted sterling has followed the fall in the Government’s poll lead. However, in general, the markets are still relatively sanguine, predicting instead a comfortable Conservative victory. Indeed, it is notable that investors bought more protection after PM May’s Lancaster House Brexit speech in the middle of January.
The polls then are being dismissed slightly as most in the markets are prepared to discount a hung parliament. Many are pointing to the fact that opinion polls tend to overestimate Labour support in the final weeks of an election. In addition, the approval rating of the leader is a better guide for the winning party than the opinion polls. What is commonly thought of as being key today will be the turnout and that of young voters who tend to favor Labour. The shy Tory factor is also potentially an interesting factor to watch, together with the intentions of previous UKIP voters in their northern heartlands. In any event, the key number to watch will be 326+ seats which will then determine the size of a Conservative majority.
Cable has been stuck in a 200 point range, more or less, since the call of the election, between 1.28 and 1.30. The most recent push through the December 2016 peak at 1.2775 ended previous multi-month bearish consolidation. We look at the three most likely scenarios to play out:
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