Pound surged and stocks on FTSE 100 rallied after the UK Conservative Party secured shock majority
The pound surged and stocks on the FTSE 100 rallied after the UK Conservative Party secured a shock majority despite polls suggesting the formation of the next British government could be a long and protracted affair.
But analysts suggested the strengthening of the currency was clouded by the prospect of an in-out referendum on Europe, which could prompt investor worries, and the uncertainty surrounding the seismic shift in support towards the separatist Scottish National Party (SNP), which could raise questions about the future strength of the United Kingdom itself.
While those questions may weigh on the minds of investors in the coming weeks and months, today they breathed a sigh of relief as the much anticipated prospect of a hung parliament and potentially a lengthy period of negotiations to form a new government appeared to have been averted.
The surprise victory for David Cameron sent the pound to its highest level in three-and-a-half years against the euro, to trade at 72.79 pence. And European stocks also rose the most since January. By mid afternoon, the FTSE 100 was up by more than 2pc.
Juliet Tennent of Goodbody Stockbrokers said the unexpectedly clear cut result removed the short-term uncertainty that an inconclusive result would have brought.
“This saw a positive reaction in sterling,” she said.
“However, the rise of the SNP and the Conservative promise to hold a referendum on EU membership mean that the future of the Union and ‘Brexit’ remain very much to the fore.”
Conall Mac Coille of Davy Stockbrokers cautioned that the new British government faces challenges.
“First, Prime Minister David Cameron seems certain to press ahead with plans for a referendum on the UK’s EU membership. Second, although UK gross domestic product growth still appears strong, it has become increasingly unbalanced, reliant on domestic-facing sectors,” he said.
“UK consumer spending has been robust but has been fuelled by 6pc growth in consumer credit.”
Mr Mac Coille said current plans to reduce the UK government deficit from 5pc in the last budget year to 2pc by 2016 and 2017 will rely on sharp spending cuts.
And he added: “The outcome of the election will be closely watched in Ireland, not only because it raises the prospect of ‘Brexit’, but also because opinion polls have understated support for the Conservative Party,” Mr Mac Coille said.
“This is especially relevant to Ireland where new left-leaning parties and independent candidates have gained support at the expense of more traditional parties and the government, following the programme of fiscal consolidation.”
Business chiefs also welcomed the Conservative victory.
“People will be surprised at the result,” said Simon Walker, director general of the Institute of Directors, in an interview with Bloomberg Television. “Business is pretty resilient but there’s positive feeling about continuing on the same course and I think the markets will react well.”
Ed Miliband, the Labour Party leader, had promised a series of new measures not traditionally favoured by business including more levies on bank balance sheets, higher taxes on the wealthy and fixed prices in the household energy sector.
Financiers in the City of London are now likely to breathe a sigh of relief. But how long that relief will last is unknown, because the prospect of an in-out referendum looms large, and could come even sooner than the originally promised deadline of 2017.
“The EU referendum is the event that creates a massive degree of uncertainty,” said Charles Allen, a senior analyst for Bloomberg Intelligence.