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Oh Snap! Prime Minister May calls Early Election
UK Prime Minister Theresa May this week announced a snap general election on June 8th. It’s not too difficult to see why she might want one given that the main opposition Labour Party appears to be dysfunctional and that the Tories have a 21 percentage point lead in the most recent polls. Labour Party Leader Jeremy Corbyn reiterated his support for an early general election, and the House of Commons approved the snap election on Wednesday.
We believe the probable outcome is a larger Conservative majority in Parliament. A new Parliamentary term would give the May government two years to negotiate Brexit and then three years to manage the transitional aftermath, which would include negotiating a trade agreement. One caveat in our forecast: the Liberal Democrats look more competitive than they were at the last elections as they currently play the role of the pro-Europe party at home, but we don’t think it’s enough to change the expected result. The timing for a snap election is right as support for Brexit remains high among those who voted for it, the UK economic data has been favorable, the British press are still pumping out “us versus them” articles stoking resentment toward the continent, and the volatility of the French elections may be deterring public opinion from Continental Europe.
We don’t see how Prime Minister May could have miscalculated and lose to a coalition of Labour, the Liberal Democrats, and the Scottish National Party. While events may sway voters over the coming weeks, Ms. May should emerge from the June election with a firmer mandate to undergo the complex and necessary rounds of negotiations of Hard Brexit which is the path she’s previously declared. A successful election result may also allow her to solidify control of own Conservative Party which, to be fair, might remove some lingering uncertainty. In fact, we see that outcome as a factor behind sterling’s post-announcement rally. However, we continue to struggle to see how a Hard Brexit is ultimately positive for UK risk assets over the longer term. We do, however, appreciate that a larger working majority for Theresa May has the potential to marginalize the extreme Hard Brexit Tory backbenchers, and this could provide an opportunity for measured negotiations with Europe, and therefore a “softer” Brexit. We will be watching the evolution of this government’s stance towards negotiations with interest leading up to, and post, June’s vote.
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