General Election 2010: Hung parliament sparks market chaos

Poo

The pound plunged up to 4½ cents against the dollar during a roller coaster 24 hours of trading as the prospect of coalition Government prompted investors to ditch UK assets.
By Richard Fletcher and Edmund Conway
Published: 9:19PM BST 07 May 2010

The inconclusive election result unnerved investors already spooked by Greece's deepening debt crisis and a global rout of equity markets.

Gilt yields see-sawed, with investors at one point demanding an extra 1.25 percentage points to hold 10 year gilts rather than German Bunds – the biggest spread since 1998. Shares also fell, with the benchmark FTSE 100 dropping 2.6pc, capping its worst week for 14 months.

Michael Saunders, chief European economist at Citigroup, said Britons should brace for a potential "meltdown" if there is no deal for stable government by Monday.

"Right now there is a firestorm of a sovereign credit crisis sweeping global markets," he said. "If markets do not get some sense on Monday that there is a solid government with a credible route back to fiscal stability, things could get very ugly indeed. A coalition of Labour, Lib Dems and nationalist parties could well precipitate a market meltdown."

The best outcome so far as investors were concerned would be a Conservative-Liberal Democrat coalition with an outline plan to cut the deficit, he said.

"The clock is ticking in the markets; today we saw the UK go from being a safe haven from the Greek crisis to one of those markets suffering on the periphery," he added.

Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: "What is needed on Sunday or Monday is a statement that says we believe we can cut the deficit together, and we will stake our reputations on it. Otherwise the markets will push for it: they will bang heads together on Monday and Tuesday."

The pound initially rose in the early hours of Friday morning, touching a high of $1.4935, as early results suggested that the Conservatives would win enough seats to secure a working majority. But as it transpired that a majority was a mathematical impossibility, it plunged, briefly touching a low of $1.4478, amid reports that Gordon Brown might attempt to form a coalition Government.

In London, the pound closed at $1.4682, down from $1.4972 at the end of play on Thursday, but regained a further cent as trading swung to New York.

"Sterling is as clear a barometer as you can get about the need for a government with a clear mandate," said Simon Derrick, strategist at Bank of New York Mellon.

Harry Adams, a trader at Schneider Foreign Exchange, said: "Any excuse to sell sterling, traders will take it."

The sell-off was broad-based, with all UK assets affected. The domestic-focused FTSE 250 was worst-hit, closing down 410.85 points – or 4.15pc – at 9491.89. The FTSE 100 also fell – down as much as 4pc at one point, although it recovered slightly to close down 137.97 points at 5,123.02. The index has lost 7pc of its value over the last week.

Bank shares were among the worst performers, with Barclays, Royal Bank of Scotland and Lloyds Banking Group lower due to fears that the Liberal Democrats would push for the banks to be broken up as part of a coalition deal with the Conservatives. RBS dropped 5pc and Barclays almost 6pc.

Dr Tim Morgan, global head of research at Tullett Prebon, drew comparisons with the hung parliament of 1974 and the IMF bail out of 1976 that followed.

"Then, as now, Britain was living far beyond its fiscal means; then, as now, the global (and local) economic outlook was precarious; and then, as now, the British electoral process inflicted indecision at the very moment when decisive action was imperative."

Credit rating agencies Moody's and Standard & Poor's said the election outcome was no direct threat the Britain's AAA credit rating.

Poo

UK stocks, pound drop after inconclusive election

Posted on Friday, 05.07.10

By ROBERT BARR
Associated Press Writer

LONDON -- Britain's stock market and the pound fell Friday as investors worried about an inconclusive result in national elections against a backdrop of global market turbulence.

The FTSE 100 share index finished 2.6 percent lower at 5,123, on top of a 1.5 percent drop Thursday. At one point, the blue chip index was down 3.5 percent as the afternoon after the market digested Conservative Party leader David Cameron's overture to the third-place Liberal Democrats to join him in forming a government.

The FTSE 100 is now 12.2 percent below its 52-week peak of 5,834 set April 16.

The British pound traded as low as $1.4449 by late morning but rallied to $1.4720 by late afternoon, still down sharply from $1.51 Thursday morning.

Beyond the global turmoil created by the debt crisis, the incomplete election returns worried investors - with no party claiming a majority, it was unclear what the next government's approach would be to slashing a ballooning debt while nurturing a so-far feeble recovery from recession.

The potential lack of a strong government "does not bode well for implementing the harsh cuts that need to be implemented to cut the budget deficit," said Marc Ostwald at Monument Securities in London.

The opposition Conservative Party claimed the largest number of seats, though short of a majority. Possible options include a minority government led by the Conservatives, coalitions involving the Conservatives or possibly a multiparty coalition excluding them.

Jonathan Loynes, economist at Capital Economics, said the market wasn't surprised by the indecisive result, which had been foreshadowed in numerous pre-election opinion polls.

"The far more important question now is whether the election result will prompt the markets to put the U.K. in the same bracket as Greece and the other fiscally challenged euro-zone economies," said Loynes, adding that Britain so far has not suffered from a credibility deficit as has Greece.

"Whether the markets continue to see the U.K. as very different from Greece depends crucially on the prospects for decisive action to tackle the U.K.'s own fiscal crisis," Loynes added.

James Knightley at ING Bank said the worst political outcome "would be a coalition government failing in a few months and a new election being called."

"This would intensify the pressure on ratings agencies to downgrade the U.K.'s sovereign rating from AAA and make fiscal consolidation even more difficult," he said.

Amid such cries of alarm, credit ratings agency Moody's Investors Service said Britain's AAA rating was not directly threatened by the election outcome.

"Moody's stance assumes that the incoming economic team can muster convincing parliamentary support for a fiscal adjustment that is no looser nor slower than was outlined by all three political parties during their respective pre-election campaigns," said Arnaud Mares, senior vice president in the agency's Sovereign Risk Group.

Simon Hayes at Barclays Capital said that if a Conservative or Conservative-led administration emerges, bond prices, equity prices and the pound could all rise.

A sharp and sustained slump in the pound was also seen as a threat to inflation - because imports become more expensive - and therefore the country's long period of record low interest rates.

The Bank of England's base rate has held at 0.5 percent since March 2009.

The Bank's rate-setting Monetary Policy Committee began its monthly meeting on Friday, and will announce its latest decision on Monday. Inflation is currently at 3.4 percent, well above the Bank's target of 2 percent.

"The pound has fallen by five cents in the past three days," said Douglas McWilliams, chief executive of the Center for Economics and Business Research. "If the slide continues, the MPC will almost certainly have to raise base rates to hit their inflation target."