12 Dec
by Vitaliy Dadalyan
(Bloomberg) — The pound jumped by the most since 2017 on mounting signs Boris Johnson’s Conservative Party was on course to secure a strong majority in the U.K. election, raising hopes of an end to the Brexit deadlock.The surge took sterling to its highest level since May 2018 against the dollar and the strongest rate versus the euro since just after the 2016 Brexit vote. The news also rippled through to other assets with the euro touching a four-month high. FTSE 100 Index futures pared an initial decline. U.K. government bonds may come under pressure at the open as uncertainty lifts, curbing demand for havens. The 64-seat majority predicted in a revised exit poll would ease tension in financial markets by allowing Johnson to push his Brexit deal through Parliament and start negotiating a trade deal with the European Union. It would bring an end to more than a year of parliamentary gridlock that held back investment and contributed to an economic slowdown.“If the exit polls prove accurate this is certainly a much bigger majority than most of the polls were forecasting,” said Fritz Louw, a strategist at MUFG Bank Ltd. “This will surely give the Tories a solid mandate to put their Brexit deal to a vote before Christmas and it seems very likely that the U.K. will be out of the EU early in 2020. On this majority the pound can probably head towards $1.36-$1.37.”Sterling jumped as much as 2.7% to $1.3514, its biggest intra-day gain since April 2017, and was 2.4% higher at $1.3476 at 3:48 a.m. London time. It rallied by 1.9% to 82.94 pence per euro, touching 82.77 pence, the strongest level since July 2016. According to futures trade, London’s main stock index will slip 0.2% at the open, with the stronger pound likely to hit multinationals earning revenue in foreign currency. Domestically-focused companies, including banks, may offset the pressure.The exit poll exceeded predictions for a 28 seat majority projected by YouGov earlier this week and results in the election backed the poll’s findings, with the Conservatives picking up seats they hadn’t won in decades.Investors favor the prospect of a market-friendly Conservative government that can push through a Brexit accord, with Johnson promising all of his lawmakers will back his deal. They were skeptical of Labour leader Jeremy Corbyn’s plans to overhaul the economy through increased spending and nationalizing key industries. Corbyn said he will stand down as leader of the Labour Party after a debate over the left-wing party’s future.Time to RepositionWith Brexit uncertainty and a minority government leading to turmoil, some investors have been opting to stay on the sidelines. This suggests there’s scope for further gains in the pound and U.K. stocks, according to Amundi Asset Management.“We should bear in mind that foreign investors were massively underweight U.K. equities since 2016 and short sterling,” said Didier Borowski, head of macroeconomics at Amundi Asset Management. “They will reposition themselves, at least partially.”A Brexit deal would also remove a key risk factor hanging over global markets. It follows President Donald Trump’s backing for an initial trade deal with China and a clearer outlook for monetary policy at the Federal Reserve and the European Central Bank after their December meetings. Global stocks are trading at a record high and investors are moving out of havens including government bonds and the Japanese yen. “Johnson’s win means he can push through Brexit and into the next phase — to me this signals that the worst of Europe’s malaise is behind us,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management in Philadelphia. “The results take away a key risk in markets and while there’s still issues with U.S.-China trade, this U.K. election is one of the big ones. Long sterling is our biggest currency position outright.” The firm has a target of $1.50.Well-Earned BreakTraders are already looking ahead to a quiet Christmas after a year fraught with political risk. A gauge of volatility for the pound over the next six months has fallen to the lowest level since April as markets foresee a brief respite before the negotiations over a final trade relationship with the EU begin.Though a Conservative majority is seen as the most market-friendly outcome, not everyone expects it to lead to a sustained sterling rally. The trade talks could prove even more complicated than the process of negotiating Britain’s exit from the bloc, raising the risk of fresh market volatility down the line.“A strong majority means the withdrawal bill gets through in January,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “I would still be wary of chasing the pound higher at these levels though.”\–With assistance from Guy Johnson, Ruth Carson and Anchalee Worrachate.To contact the reporter on this story: Charlotte Ryan in London at [email protected] contact the editors responsible for this story: Paul Dobson at [email protected], Michael HunterFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
