June 9, 2017 / 7:27 AM / a year ago

Daily Briefing: May's election backfire clouds Brexit

LONDON (Reuters) - "Theresa Dismay". "Mayhem". Britain's latest bout of political turmoil is a field day for tabloid headline-writers splashing on the British premier's election backfire.

Britain's Prime Minister Theresa May leaves the Conservative Party's Headquarters after Britain's election in London, June 9, 2017. REUTERS/Peter Nicholls

What was supposed to have been a landslide victory has wiped out May's parliamentary majority, cast doubts over her own political future and raised new questions over the shape and timing of Brexit.

The most pressing issue is whether May, facing calls even from inside her own party to consider her position, will last out the day in her job. The second is what happens to Brexit negotiations due to formally start on June 19 - a delay may now be needed. And third, is a minority Conservative government having to rely on Ulster Unionists on a vote-by-vote basis even a tenable proposition in parliament?

Even more imponderable, for now at least, is how this changes Brexit. Financial market observers are split between those who worry that it makes a confused and ultimately more painful divorce from the EU more likely; and those who argue it could in fact soften the hard Brexit (no single market, no customs union) which May was publicly advocating.

jubilant opposition Labour Party is leading calls for Brexit to be shaped by parliament consensus rather than the diktats which May favoured. It's a fair bet that most deputies in the next parliament will be Remainers or soft Brexiters - the question is whether they will feel empowered enough to assert themselves.

And then there are those already wondering out aloud whether a new election will be needed and yes, a second referendum on Brexit. None of this is what EU negotiators in Brussels were hoping for - heartily sick of all the British prevarication on the issue, they just want to get on with a smooth and clean Brexit. Some chance.


Sterling is down 2.5 percent against the dollar, and almost as much versus the euro and yen after UK Prime Minister Theresa May lost her parliamentary majority in an election in which she had sought a stronger mandate to negotiate Brexit.

Britain’s FTSE 100 index opened 0.7 percent higher, with the weaker pound a boon to the overseas-focused blue-chip companies that dominate the index. The more UK-focused middle-sized companies are down.

A minority for the Conservatives, which some market participants had flagged as the least market-friendly outcome with its potential to add more uncertainty to the Brexit process, could hit a number of domestic UK sectors, such as banks, housebuilders, utilities and food retailers, though big overseas earners, such as miners and oil majors, should provide some support.

Jeremy Corbyn, leader of Britain's opposition Labour Party, arrives at the Labour Party's Headquarters in London, Britain June 9, 2017. REUTERS/Darren Staples

UK government bond yields rose during the night but are now just half a basis point higher and slightly lower than early this week.

In a sign of what is likely to follow until the uncertain political picture is clarified, implied volatility in sterling, a measure of expected swings in the currency, is up, though off its highs.

When May called the election, polls suggested she would increase her slim majority. Polls had tightened, though many in markets had expected May to win. The prospect of a hung parliament, and possibly another election, was the outcome they had perceived as the most unsettling.

The other key question is how this affects Brexit. The reaction in euro zone government bonds is modest so far. German 10-year yields are down 0.2 basis points at 0.26 percent, well above levels hit after Thursday’s European Central Bank policy meeting. U.S. Treasury yields, which fell when an exit poll indicated May’s party would remain the biggest party but without a majority, were 0.5 bps higher at just below 2.2 percent.

Other stock movers: Credit Suisse to cut jobs as it pares back in London; Airbus CEO worried by Qatar crisis, risk of hard Brexit; Airbus sees 20-yr demand for 34,899 jets, trims traffic growth; Syngenta sells sugar beet seeds business to Denmark's DLF Seeds; EDF's Edison confirms talks under way to sell stake in Italy LNG terminal; Air France-KLM May traffic up 6.1 percent; Julius Baer battles FIFA corruption fallout as ex-banker set to plead guilty; LSE eyes more index deals after agreeing to buy Citi's Yield Book; Adidas optimistic new shoe models will drive U.S. recovery.

Gold, sought at times of geopolitical uncertainty, was down 0.4 percent at $1,273 an ounce.

Emerging stocks are inching to a new 2-yr high, heading for a weekly gain though the sector more broadly is being checked by a 0.4 percent rise for the dollar and a fall in factory gate prices in China.

Nigerian stocks are set to end the week at 21-month highs with a third straight week of gains.

Eastern European currencies firmed on Thursday after the ECB’s dovish message, with the crown hitting new three-year highs. Russian rouble and bonds may react to central bank governor’s testimony to parliament.

The weekend in the Gulf means local markets will remain quiet but monitoring CDS/bonds/forwards for the region especially Qatar.

Editing by Andrew Heavens

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