Affairs of the heart
After a weekend of recrimination and reflection, are we any closer to understanding what happened in last week’s UK election and what it will mean for the future?
I don’t think we are…
Theresa May and her fellow conservatives must feel like a lover who has misread the signals and now realises their true position in the eyes of their partner – the UK electorate – is much lower down the pecking order.
True, the new love interest Labour has been kept out of the ‘couple’s accommodation’, but heads have been turned and sleepless, fretful nights are likely to lie ahead.
In what we might view as a last ditch effort to save face, Theresa May is trying to reach out to distant relations, who could rally to her cause…
But these provincial supporters are not altruistic and will look to secure some advantage for themselves before making a firm commitment.
Marry in haste and repent at leisure, as they say!
OK, enough of the relationship analogy…
Minority rule – the formation of a government by a party that can’t claim an outright majority of seats in Parliament – is allowed under the UK’s electoral system, on the basis that such a government has the confidence of the House of Commons.
In practical terms, this means they can stay in power as long as they are not outvoted in the Commons on any piece of major legislation, such as a budget or bill to support and approve the Queen’s speech.
In effect, every significant vote becomes a battle – a battle to ensure you have enough votes to stay in power.
In this situation, policy goals may be lost or downgraded and the ‘tail may start to wag the dog’.
Now you start to see why minority government is such a rare beast in the UK and one with such a limited shelf life. The idea that such an administration could last a full five years looks distinctly far-fetched.
Harold Wilson’s 1974 minority government lasted a little over six months and is the benchmark for such arrangements in peacetime.
Of course there are examples of modern European economies functioning without an effective government. Belgium managed to survive for well over a year without a consensus amongst its rulers.
Mind you though, the Belgians weren’t in the process of trying to get a “divorce” after 44 years…
As we noted last week, the markets hate uncertainty and they hate political risk – largely because it’s full of uncertainty.
From a markets perspective, another election (which would be the result of Theresa May losing a significant vote in the commons) this Autumn, or in early 2018, would be the best situation – though only if it produced a decisive outcome – when compared to the alternative of a vote-by-vote, drip-fed crisis.
To some extent the markets are in limbo, as they hope for the best but anticipate the worst, or least a protracted period of uncertainty.
A question mark over the health of the wider market was raised in the US on Friday, as the Nasdaq and technology stocks sold off. At one stage they were down by as much as 3%.
Two things made this move stand out…
Firstly, it goes completely against the recent trend in US markets, where technology stocks have lead market gains.
Secondly, it appeared to happen in isolation as other US indices were largely unmoved, even as the tech sell-off went on.
For now that weakness and isolation are a curiosity that lacks explanation and, given that it can’t be easily explained, we should consider it as a warning flag. Though it may just be a one-off and could well be overshadowed by events elsewhere…
I say that because we have key interest rate meetings from the Fed, the Bank of England and the Bank of Japan this week.
From a UK standpoint, traders will want to hear what measures, if any, Governor Mark Carney will offer in the light of the election uncertainty.
There will be a certain amount of two-way pull here, as UK inflation numbers tomorrow will likely strengthen the case for a rate rise by the BOE, whilst the political situation favours looser market conditions.
There is a feeling of ‘déjà vu’ as far as Europe is concerned, as hopes of a resolution to political issues in Italy were sharply dented, following local elections at the weekend…
Whilst in Spain, authorities moved to ban short sales in the shares of a troubled regional lender.
Unfortunately we’ll have to get used to being surrounded by uncertainty and indecision here in the UK, at least for the lifetime of May’s fledgling administration.
That uncertainty extends into UK equity indices…
For example, the FTSE 250 index posted a bullish looking candle on Friday suggesting a rebound could be on the cards, but we haven’t followed through with that today.
The FTSE 100 seems happy to limp along just above 7500, however I do note that 7449/50 looks to be short-term support, with 7400 following up behind.
Making rational investment decisions at the moment will be very hard, simply because of the lack of visibility in the markets.
Intuitively the risk seems to be to the downside, so perhaps we’ll see some profit-taking this week, given that the FTSE 100 is up +5.4% to date, with the FTSE 250 hanging onto a +9.4% rise in 2017.
Let’s just hope that details of the deal May has struck with the DUP are made known sooner rather than later, because at least then we’ll know what we are dealing with – for better or (more likely) for worse.