UK: All eyes on general elections today - Nomura

In this UK election Mrs May’s Conservative Party is pitted against one of the most left-leaning Labour leaderships in generations and from Nomura’s perspective (macroeconomics and markets), the most important differences in Labour’s manifesto relative to the Conservatives’ relate to Brexit (at the softer, more conciliatory, end of the scale) and higher tax and spending with the likelihood of higher deficits.

Key Quotes

“Polls currently suggest a Conservative majority is the most likely outcome. However, that lead is falling and there is still time for polls to narrow further. If this trend continues at its current pace we would not rule out the possibility of a hung parliament, even if very slim.” 

“In terms of the Gilt market outlook, if Labour were to win the election, Gilt yields would probably rise thanks to a combination of a) fiscal easing lifting growth and inflation expectations, b) more substantial levels of issuance, and c) Brexit plans reducing the chances of a hard exit or cliff-edge. For GBP, we think at first it would head lower as increased uncertainty would lead to reduced inflows, but as austerity would be removed and “softer Brexit” hopes would return, higher real yields may offset this and GBP would be higher.”

“If the Conservatives prevail as we expect, it would mean a tough Brexit negotiating line, with the possibility of no deal at all, a high bar for a second Scottish independence referendum, a prolonged period (mid-2020s) before the budget deficit is eradicated, the risk of a rise in income tax/national insurance contributions, capped household energy bills (though with potentially a limited/zero impact on recorded inflation), an increased likelihood of the next MPC members being female (which would cut the number of candidates in the frame for anyone trying to second guess who will be appointed), the end of fixed-term parliaments, the state pension depending more on the outlook for wages than in the past, and increased housebuilding having less of an impact on prices than moves in incomes, interest rates and inbound capital.”

“As for the Gilt market impact, pension regulation could suggest near-term curve flattening but there is a long-term steepening bias. In terms of FX, we remain long GBP with “Brexit bill” flashpoints providing potential entry points to the trade.”