UK snap election is market-moving event and for good reason - Nomura

The analysis team at Nomura suggests that the surprise news of a snap election in the UK on 8 June is not to be taken lightly; it is market-moving and for good reason.

Key Quotes

“Historically, politicians have not called snap elections without knowing with a high degree of confidence the outcome. Whilst the next few weeks of the election campaign should see market speculation as to an “anti-Brexit” election result, it seems highly unlikely to happen. But that’s not the reason the GBP is trading higher through its “Hard Brexit” ranges. Markets like certainty, and we think a stronger conservative majority in government would provide that. One could argue that it would reduce Theresa May’s reliance on the Hard Brexit side of the party and lead her to soften her approach to the negotiations. This may prove true but could take a while to surface.”

“What we believe to be the biggest driver of markets here is that the Hard-to-Soft Brexit probability distribution has shifted from the “cliff edge” pricing and more towards the “smooth” Brexit via a transitional deal.”

“Going forward, the GBP is likely to continue to 1.30 before losing steam around 1.32 as the market proceeds to digest what a General election win for the conservatives may bring. Eventually the market may realise that this is likely to deliver the Conservatives a Hard Brexit mandate so a “softer Brexit” political turnaround still seems unlikely. While we don’t see this election being the key driver of Gilts, one concern may be around non-resident buying (or lack thereof). We take off long the belly of 2s5s10s and hold our conviction in short cash against swaps.”