By Mark Elliott
Head of Technical Research
“Our opponents believe because the government's majority is so small, that our resolve will weaken.”
Those were the words of Theresa May when she announced a snap general election, seven weeks ago. The Conservatives held a majority of 17 seats, which meant Brexit negotiations could be influenced by opposition parties and members of her own party voting against her in parliament.
The snap election offered the government the opportunity to increase its majority, but the opposite has proven the case. The Conservatives have won overall, but fallen short of securing the 326 seats needed to form a majority government.
May spent this morning negotiating with the Democrat Unionist Party (DUP) so the Conservatives can form a government the Northern Ireland party will support. This has been approved by the Queen.
In the short-term, however, uncertainty is going to prevail.
How will markets react to the election result?
Given markets had been widely expecting a comfortable majority for the Conservatives; this election outcome could cause some market bumps over the coming days.
Overnight we’ve seen UK Sterling endure some of its sharpest valuation falls of the year. That said, the dip of just under 2% – compared to the US Dollar – is much less stark as the 10% drop that followed the EU Referendum result last June. The UK FTSE 100 – which has a significant level of international exposure – has opened this morning with a small gain.
Sterling valuations have been relatively stable over 2017 so far, although have fallen slightly – compared to the US Dollar – during the election campaign. Sharp movements in currency will affect markets, due to the impact it has on multinational companies (who generate a large proportion of their profits from overseas).
Ultimately, this election was a minor consideration for markets when compared to global events. For example, the outlook for shares continues to be positive, largely due to a favourable economic growth and corporate earnings data around the world.
Although this surprise result will have implications on markets, global attention will quickly turn to the US, where next week the Federal Reserve will announce its latest interest rate decision.
What does this mean for Brexit?
In just 10 days time (June 19), formal Brexit talks had been due to begin. May had hoped to go into these negotiations with a much stronger hand by securing a bigger Parliament majority. That’s not going to be the case, which means the talks could be even more complicated.
The election result will make it even more of a challenge for the prime minister to get Brexit-related votes through Parliament. Whilst the Conservatives and DUP have stated they intend to see Brexit through, there are a wide range of opinions about the terms of leaving the EU within both parties.
This includes the all-important trade deals which will impact on the amount of tax UK and EU companies will need to pay in order to do business with each other. A Soft Brexit would involve retaining access to the single market, a Hard Brexit the opposite. This is an area markets are especially interested in.
With a wider range of views to take into account, not least DUP’s opposition to a Hard Brexit, a Soft Brexit now appears the more likely negotiating path. But with so much uncertainty in UK politics, EU officials have already suggested that Brexit talks will be delayed.
It has been well documented the government has a maximum of two years to complete negotiations, following the triggering of Article 50 in March.
How will the election result impact on our money matters?
With the Conservatives having been in power for seven years now, many of their policies about taxation are well-known – although there are some notable changes mooted.
As part of the election manifesto, the Conservatives promised to replace the current triple lock guarantee on the state pension by 2020.
- At the moment, state pension is guaranteed to rise annually by average earnings growth, the rate of inflation or 2.5% – whichever figure is highest.
- The Conservatives plan to replace this approach with a double lock guarantee (where the 2.5% pledge would be removed). This could mean state pension rises at a lower rate each year.
- Changing from the triple to the double lock system could impact on retirees who have a large reliance on the state pension to fund their retirement.
Elsewhere, May has promised not to raise VAT, increase the higher rate income tax threshold to £50,000 by 2020 and change the cap levels around funding long-term care.
Whilst nothing has been confirmed on the latter, it underlines the challenges that exist when it comes to affording long-term care. This is something that should be considered as part of your long-term planning.
The DUP manifesto wants to maintain the triple lock agreement and may also seek to negotiate some of their other policies as part of the agreement.