Voters in the UK are heading to cast their votes today (December 12, 2019) to determine the future of the UK. It would help bring all rumours and noise to an end, the ones which have brought big volatility in UK’s financial markets and especially in the domestic asset prices during the past couple of weeks.
It would also determine whether Tories bag sufficient majority to form a stable government, an outcome which had not ensued in the past two general elections. This is also the mandate required to deliver Brexit or opposition veteran Jeremy Corbyn would replace PM Johnson at 10 Downing Street to effect radical changes that he pledged in front of the electorates during his campaign.
However, the Pound Sterling sent out some classic signals of potential victory for PM Boris Johnson in this general election which is ensued by the festive season, as GBP traded 0.21% higher at 1.3220 against the US Dollar, during the trading session in the Asian market and recorded an intraday high of 1.3228 and a low of 1.3194 against the greenback currency. Also, during the December 12, 2019 trading session, GBP/USD pair reached a seven months’ high level of 1.3228, a level which was last experienced in March 2019. The currency had nosedived to its historically low level of 1.1960 against the US Dollar during September 2019, when the possibility of a no-deal kind of Brexit was at its peak. However, pollsters are betting on a potential victory for Boris Johnson, which is sending domestic asset prices higher.
Why Johnson’s victory is crucial for the UK economy? It is because he is possession of a Brexit deal with him which he had negotiated with the European Union in October, this year, which takes a no-deal Brexit entirely off the table. In the wake of a no-deal exit of the UK from the EU block, there could be catastrophic impact on the British economy, and it was largely forecasted that a no-deal kind of Brexit would weigh on the Pound significantly and drag the UK's economy into a recession.
But now PM Johnson has rescued Britain from a disorderly Brexit and more importantly, his negotiated deal went down successfully through the House of Commons. It was only that not enough time was available to discuss and pass the deal in both houses of British Parliament, which compelled the British Prime Minister to call an election and urge people to support him with a majority so that he can deliver a soft Brexit, which would be good for people, business and economy as a whole.
According to the latest comprehensive survey conducted by YouGov, it shows that Tories will bag enough majority in the House; however, victory would be with a very small margin, as it expects that PM Johnson-led Tories to secure 329 seats out of total which is adequate to form a majority government. Jeremy Corbyn-led Labour Party could get 231 seats which is far from the threshold number of seats required to form a government. The Scottish National Party, which recently get a lot of traction in Scotland, could get 41 seats and the Liberal Democrats could secure 15 seats.
Therefore, as per the YouGov numbers, one thing is clear that either it is going to be a Johnson-led Tory government or a Hung parliament. However, the margin between potential chances of PM Johnson's victory and a Hung parliament is very thin, and a small swing in votes could either break or escalate the present economic impasse.
However, the actual outcome of the General Election will be known tomorrow; This event has provided a big headroom to the speculators for the day.
Amid increasing probability of success of PM Johnson in the general election, the mid-cap stock index, the FTSE 250 traded marginally higher after three successive days of negative close. At the time of writing at 09:17 AM GMT, the index traded 17.0 points or 0.09% higher at 20,663.16, however, registered swings of about 100 points during the early part of the trading session.
The broader index of the UK, the FTSE 100 index is edging higher, and at the time of writing, at 09:19 AM GMT, it went up approximately 31.0 points or 0.40% to 7,244.71. The broader index started the December 12, 2019 trading session on a positive note as Beijing on Thursday (December 12) morning stated that it is in close communication with the United States over the phase-1 trade deal. Also, US President Donald Trump is set to consult trade advisors today, to discuss the move, as per some media reports.
The United States is gearing up to impose further tariffs on Chinese imports of approximately $160 billion on December 15, 2019, on a range of items including video games, computers and toys. If it really goes ahead with the exercise of tariffs this could bring further turmoil in the global financial markets and this would impact the world's two largest economies as well.
Therefore, global benchmark indices like the S&P 500, NASDAQ COMPOSITE, Nikkei 225, FTSE 100, China A50 would register big volatility during the next couple of days.
Also, increasing GBP could weigh on the UK's broader index "the FTSE 100" because it would impact the earnings they have accumulated in the global markets. This is because the majority of FTSE 100 constituents are global companies and earn a large chunk of their revenue and income in markets abroad.
A weaker Pound against the US Dollar hands over forex gains and boosts their earnings, when Dollars get repatriated back to the UK. That's why it is considered that there is an inverse relationship between the GBP and the FTSE 100; a rally in GBP would reduce FTSE 100 constituent companies' earnings and vice-a-versa.
Is PM Johnson’s victory important for future growth prospects?
Yes, it is widely regarded that a victory for the Tory party will break Brexit impasse, support GBP and boost consumer and business sentiments, all of which have been jolted significantly since the Brexit referendum and worsened in the last couple of months, as earlier a no-deal Brexit option was under consideration.
However, there is a lot of uncertainties over how PM Johnson is going to establish future trade relationship between the UK and EU post-Brexit in January 2020, as he vowed that his government would not extend the final deadline of a complete future trade relationship deal with the EU beyond December 31, 2020.
But in the near term, his victory would cheer investors, businesses, consumers and bring confidence among global portfolio investors as well.
Now it is high time to bring global investors back to London, as UK equities have long underperformed the global equity markets since Brexit referendum in 2016 and there is a significantly higher valuation gap between the UK equities and global equities of similar risks and profiles.
If things move in the perceived direction, then this Christmas the London Stock Exchange may provide a lot of "equity gifts" to the investors. Also, 2020 could be the year for the LSE-listed equities.
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