Developments in sterling would almost universally be negative in the short term should Jeremy Corbyn become prime minister, according to most analysts.
With just over one week until the general election, Theresa May’s lead in the polls appears to have stabilised, albeit at a much lower level than just a few weeks ago.
At the start of the campaign, May’s lead was as high as 21 points in some polls, but it has now narrowed to around 7 points on average.
Those numbers still suggest May will be prime minister after the election, with a Conservative majority in parliament, but the potential for a Labour government has become more realistic in recent weeks.
While it is highly unlikely that Jeremy Corbyn will end up in Number 10 come June 9, the prospect of Prime Minister Corbyn is not beyond the realms of possibility after the recent narrowing — with a coalition between Labour and the SNP mooted in recent days.
Investors have spent most of the campaign betting on an increased Tory majority with May at the helm of government as Britain negotiates Brexit, but Labour’s recent poll surge has caused many to consider the prospect of a government led by Corbyn, and what that could mean for the markets, especially the pound, which has been incredibly vulnerable to political developments since the Brexit vote.
“Looking at how much we have moved since this election was called, it is pretty clear the response would be negative and if I had to put a figure on it, I would say a kneejerk sell-off of 5% or a bit more,” Adam Cole, head of FX strategy at RBC Capital Markets told the Daily Telegraph on May 27.
Writing earlier in May, ING FX strategist Viraj Patel notes that even if Labour were to win, the likelihood of a majority for the party is tiny. Instead, they will enter a coalition with the SNP, and possibly the Lib Dems, which could have mixed consequences in the markets.
Here is Patel (emphasis ours):
“We think a Lab-Lib-SNP coalition risks having a Marmite effect on markets: either they will ‘love it or hate it’. On the one hand, a softer Brexit could be the goal of a Labour-led coalition government; but on the other hand, it raises political uncertainty — which has proven to be GBP’s Kryptonite over the past year. In the short-term, we would expect the uncertainty factor to prevail.”
ING’s commentary is accompanied with a forecast of a drop to around 1.25 on the dollar in the aftermath of Corbyn’s ascension to the office of prime minister. That would mark a fall of around 3% from its current level of around $US1.2860.
Jordan Rochester and his team at Nomura are mildly more optimistic, writing on May 24 (emphasis ours):
So once the knee-jerk reaction lower in GBP takes place, the expectation of tighter BoE policy would see an improvement in real yields and the fall in GBP to eventually be offset. GBP would also benefit from Labour’s stance on Brexit being somewhat “softer” than the Conservatives, especially if it forms a coalition with the SNP and Liberal Democrats.
A coalition government may encourage some to argue GBP should be lower owing to the uncertainty. But the removal of austerity (leading to higher real yields) and renewed arguments as to a “softer” Brexit are likely to inspire less GBP negativity as once thought.
JPMorgan’s currency team takes a similar view, writing last week that a possible hung parliament — if the Conservatives fail to secure a majority — could end up as a positive for the pound.
“In the post-referendum world, all political developments need to be viewed through a Brexit prism and an argument can be made that a hung parliament which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties (Labour/Lib Dems/SNP) might actually be GBP positive,” the bank writes.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.