Despite it being long, hard fought and gruelling – for protagonists and public alike, perhaps one of the most interesting aspects of this general election campaign is that even as we enter the final stretch, in terms of the likely outcome not a lot has changed. Utilising odds from bookmakers rather than the polls which normally a better predictor, a hung parliament (1/9) is effectively guaranteed, i.e. no party wins an overall majority.
One surprise is the absence of any late incumbent swing and, while the Conservatives are still expected to gain the most seats (1/2) but not a majority (8/1), there is likely to be insufficient support for the Conservatives to form a minority government (4/1). Indeed, in recent days odds have swung towards Mr. Miliband becoming the next PM (8/11) and a Labour minority the next government (7/4).
With the apparent failure, so far, of the Conservatives to produce any shift in voting intentions, many pundits now expect a Labour minority government with ad-hoc Liberal Democrat and SNP support.
How Have Financial Markets Reacted?
Most commentators have predicted sterling weakness, yet even as a more supposedly business/market 'unfriendly' government appears increasingly likely, the pound has rallied and, month to date, trade weighted sterling is up 1.7%, appreciating in all main cross rates.
So far in April, gilt yields have jumped 10bp to 1.68% but there is little to indicate this is necessarily election specific as spreads over the US have narrowed but widened relative to Germany. There is evidence that foreign investors sold gilts in January and February, the latest data available, while demand at recent gilt auctions has eased.
As for equities, the FTSE 100 has outperformed the S&P 500, Euro Stoxx and the Nikkei month to date, gaining 4.4%, while volatility is unchanged.
That UK equities have outperformed those in the US and Europe by 5% in sterling terms hardly smacks of overseas investor panic at the recent change in the odds of a Labour minority government. There is some evidence of non-resident gilt sales but these were dwarfed by domestic buying.
Indeed, the reaction of financial markets so far is effectively the reverse of what most pundits had predicted and just goes to show how much more difficult financial markets are to predict than elections.
