No sooner had we recovered from the chocolate hangover of the Easter weekend than UK Prime Minister Theresa May pulled her own bunny out of a hat by announcing a surprise general election to be held on June 8th. We’ve seen some serious U-turns from U.S. President Trump since his election, but this was arguably as big as any made by Trump, as May had consistently ruled out going to the polls early. So what caused her to change her mind? Firstly, it was a consummate political act. Her Conservative party have a massive 20-point lead over the opposition Labour party in the opinion polls, meaning she is likely to increase her majority in the parliament from the current 15 seats to somewhere in excess of 50 seats. Secondly, there’s a feeling in markets that the UK economy might be about to suffer a significant loss of momentum, and last Friday’s retail sales backed up that feeling. We’ve spoken in past blogs about how the UK consumer has been driving the UK economy, but that much of that spending was being financed by credit card debt. As inflation rises, and wages remain stagnant, real incomes are being squeezed, signalling a slowdown in spending. So from a politician’s point of view, the current economic backdrop is about as good as it gets going into an election. Thirdly, and probably most importantly, we believe there is a growing acceptance amongst UK government officials that a Brexit deal will take longer than 2 years and will probably entail some significant concessions by the UK. Given that the next election was originally pencilled in for Spring/Summer 2020, that timeline could have caused difficulties for PM May and the Conservatives. Assuming they win this election, May has until the Summer of 2022 to agree a deal with the EU before she next faces the electorate. Sterling rallied significantly on the news, given that most people think this could lead to a “softer” Brexit and also given the size of the short position in Sterling, which has built up since before the referendum in June 2016. We are pretty agnostic on Sterling at these levels, and can find reasons to be both bullish and bearish in the short-term, so we prefer to stay on the sidelines.
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