SIMON WATKINS: Financial markets are under-pricing political risk as election campaign gets underway
The sight of seven political leaders vying for voters’ attention on Thursday night was unprecedented in modern British political history. This alone is raising fears in the City that the real drama will come not in the next five weeks of campaigning, but the weeks of horse-trading which follows. And in case there is any doubt, the word ‘drama’ is not a positive one as far as financial markets are concerned.
Some economists in the Square Mile were already warning before last week’s debate that the uncertainty of a hung parliament was being underestimated and that faced with the reality of minority government of whatever persuasion markets will gyrate.
Royal Bank of Scotland’s senior economist Ross Walker declared that ‘British government is about to become much less stable and predictable’, adding that so far financial markets had ‘under-priced’ the political risk.
Tough talking: Some economists were already warning before last week’s debate that the uncertainty of a hung parliament was being underestimated
If anything that warning is even clearer after last week’s seven-way debate. Pundits were divided about who was the winner, but if there was any consensus it was that the smaller parties – from the Greens to Ukip and the Scots and Welsh nationalists – had all gained from being granted a platform alongside the main players.
Much has been said about the pros and cons of a Labour or Conservative-led government – with business leaders conspicuous in their fear over Labour, with a small whiff of concern about the Conservatives’ pledge of an EU referendum.
But if some business leaders are fearful of Cameron’s referendum promise, they will be terrified of Nigel Farage’s feverish anti-EU rhetoric. And if they are fearful of Ed Miliband’s tax policies and less rigorous approach to austerity, they will be horrified by the even more open plea for higher business taxes and higher public spending from the SNP, Plaid Cymru and the Greens.
But what may be most unsettling will be the simple uncertainty, which could lead to weeks or even months without a clear, strong government of any persuasion emerging from the electoral wreckage.
Barring a remarkable poll shift, we are looking at a real bun-fight after May 7 and a prolonged period in which it is far from clear how much austerity will continue and exactly what deficit targets or tax policies are being pursued.
Expect the stock and bond markets to become increasingly febrile as polling day looms and the City faces up to this possibility – as Walker points out the Scottish referendum showed how markets can move abruptly ahead of an election if the pollsters start showing unexpected outcomes.
But the real rollercoaster for share prices and bond prices may well set off on May 8.
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