News & Analysis

Britain goes to the polls: The potential effect on markets is being ignored!

Andrew Saks, Thursday, 6 May 2021

Today, Britain, weary after a year of seemingly endless lockdowns and facing the largest recession in 300 years at the hands of the most bizarre political environments in recent history, went to the polls.

In truly dignified British spirit, this opportunity to show the politicians what the people want has appeared as though it is a normal, standard working day.

Unlike the displays of unrest which have been present across various mainland European cities during the past year, Britain has maintained the stiff upper lip for which it is famous and tolerated the adversities thrown at it by Westminster.

Now the opportunity has come for the great people of Great Britain to have their say at the polling booths. Ordinarily, this would be a matter of routine course, and given the two-party dominance that has made up the default political style of the United Kingdom for many decades and the similarity of the two major parties, the financial markets are rarely affected more than a small amount on each election day.

One of the many attractions of doing business in the United Kingdom over recent years has been its steady, well organized and non-volatile economy upon which domestic politics rarely have any impact.

Labour and Conservative, two names signifying very different original political ideologies, are very similar in their modus operandi these days, and after a year of lockdowns and the same soundbites coming from the leaders and senior politicians in both parties, the quietly astute and analytical British public may well look toward a new guard.

Today, London's Mayoral Election, Scotland's potential independence, and a raft of local authority seats are all hot topics among voters, and unlike any previous election day, Britons are viewing a very different commercial and economic landscape to that of the last election day, as the messages and policies from central government and the mainstream opposition parties are similar to each other, yet very different to even one year ago.

As a result, a number of new parties have been formed, and the London Mayoral Election has the largest number of candidates in modern history, with no fewer than twenty, including pro-liberty, pro-business, anti-lockdown contingents David Kerten and Laurence Fox.

In the local elections, mainstream news considers some degree of market movement may come from what is being quite an exaggerated 'major electoral test' for Prime Minister Boris Johnson and for Labour leader Keir Starmer in the north of England, plus potentially providing a steer on current attitudes to Scottish independence. With both Mr Starmer and Mr Johnson so similar in their policies, and having worked together routinely over the lockdown period, it is clear that the analysts and investors will likely not allow this to influence their trading decisions.

There is, rather alarmingly, a fleet of heavily armed Navy patrol ships in the English Channel, sent to stem a perceived blockade by French fishermen. With the UK now outside the European Union, and a military response to a commercial matter, the reaction by France could create a degree of fluctuation between the Euro and the British Pound in that trade could be affected between the British Isles and mainland Europe if this escalates.

If it all amounts to nothing, and is simply a visual flexing of muscles in a post-Brexit era, there may be caution during the course of the next few days, leading to a rebound of the Pound against the Euro next week when it is clear that very little will occur.

Estimates, if they are at all anything to go by, show that the Scottish National Party could take 68 of the 129 seats at Holyrood, which would be the pro-Scottish independence party's highest majority in ten years. Should Scotland go independent, the British pound may strengthen in value due to the lack of need for Westminster to send funds to a far less economically strong Scotland, but could cause even more volatility in oil prices because Scotland is a major producer of oil, therefore may use its supply as a bargaining tool once independent.

Crude oil has been a very volatile commodity recently, as the demand in the West has dwindled due to the focus on renewable energy and away from fossil fuels, even in Asia with India, the world's third largest importer of oil having imported just 3.97 million barrels per day (bpd) in the 2021 fiscal year to March 31, down 11.8% from a year earlier.

In London, a re-election of socialist mayor Sadiq Khan would not surprise investors so much that it would create a downturn in stock or currency values, it would just be a mere disappointment to the City of London's financial sector, and could cause more high net worth individuals to move out of the city, however should Laurence Fox or David Kerten achieve a substantially higher number of votes than expected, the mainstream would be sent a clear message that the need for change is on the minds of many Londoners, and create a pro-business, pro-free market dynamic among small businesses, which in turn would be a factor that could strengthen the Pound as owners of small businesses seek to reopen.

Not everyone is convinced there will be sharp moves in the pound just yet. ING developed markets economist James Smith and chief EMEA FX and IR strategist Petr Krpata stated yesterday via mainstream media that “although the Scottish election may bring back negative headline news about another Scottish independence referendum, we don’t think this should have an overly negative impact on sterling.”

The consensus among the top tier bankers is that any potential referendum on Scotland's independence would be several years away even if the Scottish National Party gain a majority and start campaigning for it now.

Thought from London's financial markets participants is that during the Brexit referendum a few years ago, the risk premium started to be built into GBP only six months ahead of the event itself and also that the first Scottish referendum in 2014 did not translate into a material build-up of GBP risk premium.

One particular consideration is that if Scotland did eventually gain independence and re-join the European Union, there would be a big question over which currency it would use.

Would it eschew the Pound and adopt the Euro, or would it create its own currency which would not be a major and therefore remove one entire national economy, regardless of its relatively small size, from a region whose FX market is bound by majors?

Either way, that is a very important consideration, and ultimately matters more than whose local economy gets the oil receipts.

A move to Euro and the European Union for Scotland, leaving an independent, non-EU member England, Wales and Northern Ireland with the strong Pound, would likely result in some unusual market movements.

Meanwhile, it's business as usual, chaps!

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