There were at least three big consequences from the UK elections. (1) The Conservatives won a decisive majority and Brexit is happening by January 31, 2020. (2) Labour is likely to move to the centre after the resounding defeat and the poor showing from the Liberal Democrats. (3) The SNP will interpret their victory in Scotland as a mandated for a second referendum. Below we discuss each one.
In terms of price action, the pound is up 2.0% against the dollar and 1.5% against the euro. As you would expect, we are getting a sharp contrast in sectors within the UK equity market with small-caps outperforming large-gaps and exporters underperforming. Yields are up 3-8 bps across the curve over the last two sessions.
(1) Conservative Victory: Brexit, but not necessarily a hard one
Brexit is happening, but it’s too soon to say whether it will be a hard or softish one. A majority of 76 means that the Conservatives will not be hostage to the Brexit-hardliners (such as the Tory backbenchers in the ERG), thus able to calibrate a deal to his liking. But the transition phase is set to end in December 2020, which is a short timeline for sealing such a complex trade agreement—and failing to do so would mean falling back on WTO rules. Johnson said he wouldn’t extend the deal, but we don’t take this as dogma or think this deadline represents an unsurmountable cliff-edge.
(2) Labour and SNP Loss: Redefining the Centre
The failure of the far-left incarnation of the Labour and the implosion of the Liberal Democrats suggests that power vacuum at the centre will be filled by Labour. This was the worst result of Labour in 80 years and Jeremy Corbyn already said he will step down as the party leader. The Liberal Democrats didn’t even manage to secure a seat for its leader Jo Swinson. The logical outcome of these events would be for Labour to redefine itself with a more centrist platform to avoid the fate of the socialist party in France. But whatever happens, having what is left of an opposition in disarray will strengthen Johnson’s grip on power, allowing him to implement his visions beyond the Brexit conversation and onto the UK’s domestic agenda.
(3) Scotland: A new battlefront
The SNP won 48 seats last night compared to their 35 in 2017. SNP leader Nicola Sturgeon declared that Scotland has sent a clear message to push for another independence referendum. The emphatic victory pits a euphoric SNP against a Conservative majority government that has promised to reject a second referendum no matter the result of the 2021 Scottish parliament elections. We don’t foresee this becoming a market moving theme, but it will become a salient source of tension within UK politics for some time.