LONDON, United Kingdom. Jittery City investors are bracing themselves for a prolonged period of post-election uncertainty, after share prices fell in London, against the backdrop of a tumultuous day’s trading on global financial markets.
The FTSE100 index of leading shares lost more than 100 points on Thursday morning, but recovered ground to close at 6887, down 47 points on the day.
With sterling all but flat on the day against other leading currencies, there was little sign of panic at the prospect of a hung parliament. “Markets are pretty relaxed about the outturn,” said Philip Shaw, chief UK economist at Investec.
But with the final opinion polls placing the two major parties within a whisker of each other, financial analysts were poring over implications of different potential results.
The City’s reflex approach might be to favour the Conservatives, with their plans for more rapid deficit-reduction, over Labour, which has promised to take on vested interests, including in the financial and energy sectors.
But analysts said investors were also weighing the risk of Britain leaving the European Union under a Tory-led coalition. David Cameron has promised a referendum on whether Britain should leave the EU – a so-called Brexit – by 2017.
“If I’m layering the risks, and seeing what is the thing that could do most damage to markets after the initial stage, then it’s Brexit, rather than the fiscal plans of the Labour party,” said Brian Hilliard, chief UK economist at SocGen.
He added that with Europe’s bond markets in a tailspin on Thursday, it was hard to separate pre-election nerves from other factors weighing on markets. “I don’t think you can isolate the effects of the election.”
German bond yields – the interest rate that Berlin pays on its borrowing – shot up in the, before collapsing back later in the day. Jasper Lawler at CMC Markets UK said: “European stock markets were left a little out of breath on Thursday as government bond markets pulled a full 180-degree turn from savage losses to a sizeable move higher.”
According to BATS Global Markets, it was one of the busiest days for European stock markets in the past two years. About €72bn (£53bn) of shares changed hands – double the average for a typical day in May.
Shaw, of Investec, warned that investors would become more anxious in the coming days, if the parties’ efforts to assemble a parliamentary majority are not successful.
“It’s a cliche that investors hate uncertainty; but if we get an extended period where we have got no government, that’s going to be market-negative.”
Erik Britton, director of City consultancy Fathom, agreed that Brexit would soon become the focus of investors’ fears, if a Tory-led coalition was returned to power.
“If we’re heading towards a Tory-led government, then the first thing that happens after that is that the markets start to price in a referendum,” he said.
He predicted that gilt yields – the interest rate that the UK government pays on its debts – could jump by as much as two percentage points in that scenario; sterling could fall; and businesses could delay investment decisions, hitting economic growth.
Terry Scuoler, chief executive of manufacturing group the EEF, said businesses would be looking for an early statement from any Tory-led government about what it hoped to achieve in EU negotiations. “Our message would be, ‘Please set out quickly what it is you are looking to be reformed; but the leadership must push, and must support, the UK staying in the EU,” he said.
He added that a new government of any colour should focus on investing in skills, apprenticeships and export support, to boost economic growth.
Pre-election jitters were overshadowed in the financial markets for much of Thursday by the chaos in European bond markets. Investors across the Channel are nervous that the European Central Bank president Mario Draghi’s €60bn-a-month quantitative easing programme has artificially pumped up bond prices, creating an unsustainable bubble.
Continued efforts by Greece’s radical Syriza government to draw up a new rescue deal with its creditors and avoid bankruptcy have also been playing on investors’ minds.
With talks set to continue over the weekend, Greece’s pugnacious finance minister, Yanis Varoufakis, insisted on Thursday that an agreement was within reach – “in the offing in the next few days, or weeks” – and the stock market in Athens closed up 3%. Germany’s finance minister, Wolfgang Schäuble, however, said he thought there was little hope of an agreement at the key Eurogroup meeting on Monday – a day before Greece is scheduled to hand over a further €770m to the IMF.
The threat of Greek bankruptcy also formed the backdrop to the last UK general election five years ago.
Shares were also sold off in several other world markets, led by the US, after Federal Reserve chair, Janet Yellen, said late on Wednesday that she thought equity prices looked “quite high”, which might create “danger”.
