All you need to know about tomorrow's general election in the UK, broken down into several parts.
From RanSquawk, Deutsche Bank, Lloyds, and WSJ
Why has a Snap Election been called?
On April 18th PM Theresa May surprised many by calling for a snap election for June 8th . May stated that her reason in doing so was to “strengthen her hand in Brexit negotiations”. While at the time that the snap election had being called, the Conservative party had a commanding 20ppt lead in the opinion polls, an opportunity that may not occur again. As such, a result of this size would make it harder for parliament to overthrow any deal May returns with from Brussels, potentially leading to a cleaner Brexit with the risk of a ‘no deal’ lower.
UK pollsters were originally predicting a landslide for PM May backin April, subsequently leading many to believe that the risk surrounding the election is relatively low, with the Conservative party seen increasing their current majority by some 75-125 seats. However, a notable shift in the polls has been observed since the release of both the Conservatives and Labour parties’ manifestos, moving in favour of the latter. In turn, this has resulted in some modest pullback from 2017 highs in recent weeks and somewhat elevating the risk regarding the election with some polls narrowing the Conservatives lead to as low as 4ppts. However, given the recent performance of UK pollsters over the 2015 election and EU referendum, they could be taken with a pinch of salt.
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Poll narrowing has increased probability of alternative scenarios
Following the sharp narrowing of the Conservative’s polling lead in recent weeks, the Conservatives’ lead over Labour is now down to 7 points. Comparing this to the historic margins of error seen over previous elections, current polling remains just in excess of the largest polling miss observed since 1992 – a 6.3pp overestimate of the Labour vote share in 2001 – and well in excess of the average polling error over these votes. At the same time, in elections since 1992 the pollsters have consistently underestimated the Conservative’s vote share, by 2.1pp on average. (chart below).
Given this clear trend for polls to underestimate the Conservatives for various reasons, including issues of poor sampling together with the “shy Tory phenomenon” – pollsters attempt to correct their survey results to account for this dynamic. The risk therefore is that the polls could be over-correcting and therefore giving the Tories an advantage in the polls.
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- Most Likely: PM May to win a larger majority (50+) which would supposedly allow for a much more stable Brexit process, through consolidating power while also making her less vulnerable to remainers within her own party, while the risk of a ‘no deal’ is lower and in turn lead to a cleaner Brexit. This can also suggest that it would be easier for PM May to agree on a transitional deal with the EU, mitigating some of the negative economic effects, as the next election will not take place until May 2022.
- Market Reaction: Initial spike in GBP, however given the rise in the currency since the announcement (1.2520 to 1.2900), this outcome has largely been priced in which could limit any move to the upside, consequently leading to a ‘buy the rumour, sell the fact price action. Stocks to watch: Centrica and SSE likely to take a hit if the Conservatives impose a cap on standard variable tariffs. As it stands, GBP/USD o/n vol is to reside around 29/120 pips.
- Likely: The conservative party win a slim majority (5-10 more seats) or relatively unchanged from current. This could possibly lead to a less stable government, making Theresa May more vulnerable to Brexit hardliners within her own party, subsequently raising the possibility of a ‘no deal’.
- Market Reaction: Risks are tilted to the downside and as such, this outcome would likely see GBP met with selling pressure, alongside a fall in UK Gilt yields as some suggest this risks a more confrontational approach to Brexit negotiations, subsequently increasing uncertainty.
- Unlikely: Labour manage to pull a surprise and form a majority through a coalition with SNP and Lib Dem, this would undoubtedly complicate Brexit negotiations, with analysts at Danske Bank noting that this outcome could potentially lead to Brexit being cancelled altogether or sway to a softer Brexit.
- Market Reaction: In an immediate reaction, GBP will likely drop off alongside equity markets as a whirlwind of uncertainty lingers over UK political front. Analysts at PIMCO state focus will shift towards a looser fiscal policy and an untested government. Stocks to look out for would be UK utilities (Severn Trent, Centrica, SSE, National Utilities and United Utilities) which would likely drop off amid Labour’s plans of nationalisation.
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Heading into this general election, the FX markets appeared to be overly complacent with prevailing opinion poll data, suggesting the Conservative Party would return to power with an enhanced majority. Indeed, following the announcement of the election (18 April), Bloomberg calculated implied seat majority for the Conservative Party (Chart 2) rose to 200. This subsequently turned out to be the peak majority figure as calculated by Bloomberg and since the start of May has declined to currently stand at 58 as the opinion polls show a narrowing of the Conservative Party lead. Market complacency on expectations for a sizeable majority was one of the motivating factors behind our view that GBP was likely to face near-term headwinds in the coming months as investors "buy the sizeable majority, sell the fact". Unsurprisingly, a narrowing of the polls has seen GBP TWI fall by over 3%, peak-to-trough in May.
Coalition is the sweet spot for Sterling
Recent opinion polls (Chart of the day) have shaken markets from their lethargy. In FX, demand for GBP puts (proxied by risk reversals) has increased in the short duration tenors, while one-week GBP/USD implied volatility is close to 2017 highs. A Labour-led coalition would ultimately be the most positive scenario for GBP and while a large Conservative victory would be initially bullish, large majorities are no guarantee for strong subsequent performance. A Labour majority/small Conservative majority would both be initially bearish for GBP.
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Cheat Sheet Summary of Market Reactions:
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Process for forming a coalition government
Given the tightening of the polls, there is a risk that no party gains an overall majority. This would lead to a hung parliament scenario with either a minority Conservative government or a Labour-led alliance supported by the Lib Dems and the SNP.
In terms of the process for forming a coalition - the 2010 negotiations lasted five days, beginning with the leaders’ speeches on the Friday morning and concluding with Cameron and Clegg’s joint press statement on the following Wednesday.
The next state opening of Parliament (the Queen’s Speech) is scheduled for the 19th June which would be an important test in the event of a Conservative minority government. If the vote on the Queen’s speech fails to pass then either a new government would attempt to be formed or we move towards fresh elections.
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Seats to watch on election night
In the UK’s first-past-the-post constituency level system, marginal seats are crucial in defining the outcome of elections. In this section we compile the potential swing seats to watch based on different criteria, ranked by the expected timing of their declarations on election night.
Seats to watch 1: 2015 marginal seats (<5% winning margin)
Marginal seats are typically defined based on the size of the majority of the current MP relative to the next best party in the last election. In Figure 6 below we list the most marginal constituencies in Great Britain in the 2015 election – listing the 52 seats in which the margin of the winning party ahead of the runner-up was less than 5%. We list the seats by the time they are expected to declare their result according to the Press Association. This expected timing should be seen as an indication only , with close results increasing the chances of later declarations.
Seats to watch 2: seats vulnerable to Brexit preferences and tactical voting
However, with the Brexit referendum last year and leadership changes across the major national parties since the last election in 2015, it may be that a traditional margin-based seat list is less appropriate than in the past. Limiting our analysis to England & Wales, which contain the majority of marginal seats, we consider which seats currently held by the two largest parties could be vulnerable based on attitudes to Brexit and potential scope for tactical voting.
To make a list of potentially vulnerable Conservative seats we apply two criteria:
- the seat voted more ‘Remain’ than the UK average (or is estimated to have ) and
- the Conservative vote share in 2015 was less than the combined share of Labour, Liberal Democrats and Greens leaving the seat potentially vulnerable to ‘progressive’ tactical voting
For vulnerable Labour seats we apply the criteria of:
- the seat being more ‘Leave’ than the UK average
- the combined vote share of Conservatives and UKIP being greater than that of Labour, Lib Dems and Greens
The gives two lists of 21 and 33 seats respectively presented in Figure 8 and 7. A number of these seats, such as Conservatives’ Croydon Central and Labour’s Halifax appear both on these lists and on the list of marginal seats. However, this combination of criteria also suggests seats such as the Conservatives’ Bristol North West and the Labour seat of Wrexham, the latter expected to come quite early in the night, could be bellwethers as to whether either side is able to take advantage of Brexit sentiment or tactical voting.
Of the two seats that have changed hands since 2015, one makes the list – Copeland, which was lost by Labour to the Conservatives earlier this year. However, Richmond Park – regained by Lib Dems from Tories in late 2016, does not make it, as the 2015 Conservative majority was too large to meet our criteria
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Timing on and following election night
Polls open from 7am and close at 10pm on Thursday.
The publishing of polls is not permitted on the day until after polling closes– at 10pm Ipsos Mori will publish the official exit poll for the BBC and Sky News.
The 10pm exit poll will also give a projection of the ultimate seats won by each party. Historically these forecasts have been very accurate (within 15 seats for the winning party) but this means that if the exit poll projections are tight – i.e. within a 20 seat majority for the Tories - the margin of error means we may not know by 10pm which of the potential outcomes across small Conservative majority, Conservative minority or Labour coalition are the most likely.
The vote count begins at 10pm with the first results typically declared between 11pm and midnight.
The bulk of the declarations begin to flow in from about 2am. By around 4am we should have ~50% of the vote counts declared and a good idea of the result and by 6am close to 90% of the vote count (see chart below).
In the case of a clear majority for the winner, the tradition is for the leader of the winning party to wait for the leader of the losing Party to concede before claiming victory. In 2015, David Cameron accepted victory just before 6 am.
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