InTouchFX: UK General Election Preview
February 2015
Please contact Graham Williams on 44 20 8605 4390 or [email protected] if you have any questions regarding the
piece or the broader product offering from InTouchFX.
UK General Election
This is the most uncertain General Election for decades, and not just because of the question of who will form a
government:
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What kind of government will it be?
How long might it take?
What does it mean for the EU referendum?
Will there be another election?
We answer those questions and consider how it might affect your portfolio:
 GBP volatility
 Delay to BOE rate hikes
 Risk premium for Gilts
Where are we now?
This General Election is so uncertain because of the end of the two party dominance of the UK electoral system. Between
them, Labour and the Conservatives only gain around two-thirds of the vote, compared to over 90% after the Second World
War:
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This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
One in five people do not identify with a party – the pale blue line in this chart is one of the only lines that has been on a
steady upward trend for decades:
The latest polls continue to show that added together, Labour and the Conservatives remain on about 65% of the vote. The
trouble is that the Liberal Democrats used to capture a solid 20% of the vote, meaning that fringe parties remained firmly in
the shadows. Now that the Liberal Democrats are polling less than half of this, the door becomes wide open for others to step
into the limelight.
A consistent poll of polls can be found at http://ukpollingreport.co.uk
It has continued to show the two main parties neck-and-neck for the past six months, with the minor parties steadily rising.
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London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
1. How did this happen?
UKIP overtook the Lib Dems as the third party in the polls from February 2013, but the market has only really been shaken into
concern over this election since last September. That’s because the uncertainty over the election has been driven by the
decline of the Labour vote. Here is a chart of the polls during the life of this parliament 1. (Red is Labour, Blue Conservative,
Purple UKIP, Yellow Lib Dem and Green is obvious!)
1
http://commons.wikimedia.org/wiki/File:UK_opinion_polling_2010-2015.png
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
The narrowing between the Labour and Conservative lines took place after the Scottish referendum result. For those who are
unaware, Scotland has always been a heartland for the Labour vote. Out of the 257 Labour MPs currently in parliament, 41 of
them represent Scottish seats. Since September, the Labour party in Scotland has been in disarray. The leader of the Scottish
Labour party, Johann Lamont, quit in despair only a month after the referendum, saying that the party in Westminster
considered her party only as a “branch office” 2.
In the vacuum it took to appoint a new party leader (Jim Murphy was elected two months later, on 13th December), the
Scottish Nationalist Party have captured the initiative. STV, the Scottish television station, conducted a poll with Ipsos Mori at
the end of October 2014 3, showing Labour’s vote halving to 23%. On a uniform swing basis, this is what the constituency map
could look like in Scotland:
In other words, Labour could be wiped out, losing a significant chunk of their 41 MPs. As we know, however, the UK operates a
first-past-the-post electoral system, so it is not always easy to predict how votes will distribute themselves within individual
constituencies.
On the 4th of February the Conservative peer Lord Ashcroft revealed the results of his company’s polling in various Scottish
seats. It appeared to confirm that the strength of the SNP vote is real, with even previously comfortable MPs likely to be
concerned about losing their seats. Here, for example, is the result of the poll in the constituency currently held by Danny
Alexander, who is currently Chief Secretary to the Treasury 4:
2
3
4
http://www.independent.co.uk/news/uk/politics/johann-lamont-resigns-party-has-no-clue-on-scotland-says-former-labour-first-minister-9818656.html
http://news.stv.tv/scotland-decides/297729-stv-poll-labour-would-annihilated-if-general-election-held-tomorrow/
Politicalbetting.com
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This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
The swing of 25% to the SNP was fairly uniform across the constituencies polled. Labour have been left vulnerable and all
because they spent most of this parliament pursuing something called the “35% Strategy”. The idea of this strategy was to
take advantage of the natural bias that the electoral system gives to the Labour party. For example, in 2010, the Conservative
party won a higher proportion of the vote than Blair in 2005, at 37%, but only won 307 seats, 19 short of a majority.
Why is there a bias for Labour?
1. The unequal size of constituencies. Labour seats tend to have fewer voters, so they need fewer voters to win the seat. Of the
20 smallest seats, 12 are held by Labour compared to 5 for the Conservatives. This has happened over time as populations in
the industrial north have declined, but those in the more affluent south east have risen. Any delay to a boundary review
therefore tends to entrench the bias towards Labour. Current boundaries were based on the population of the year 2000, so
will be 15 years out of date by the time this election comes around. The Conservatives had tried to enact a fresh boundary
review in this parliament, but it was defeated after the Liberal Democrats reneged on a deal and voted against the
government. (It was the first time they voted against their coalition colleagues 5.)
2. Voter turnout. The voter turnout in Labour seats tends to be lower than in Conservative seats, because Labour voters tend
to be in those social groups that are less likely to vote.
3. Wales has a separate electoral quota. The quotas for Scotland, England and Wales are different which means that Wales has
40 seats, but if it were using the same quota as England, it would have only 32. Labour tend to perform better than the
Conservatives in Wales.
5
http://www.bbc.co.uk/news/uk-politics-21235169
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
4. Tactical voting. Liberal Democrat and Labour voters lend their support to one another in order to 'keep out' the Tories. This
effect doesn't happen so often the other way around - i.e. you don't often find Lib Dems voting Conservative in order to keep
out Labour. This means that the Conservatives would need even more votes to win.
"The 35% Strategy"
All of the biases above mean that for Labour to win an overall majority, they need less of the popular vote than the
Conservative party do. If Labour gain 35% of the vote then that should translate into the magic number of 326, which would
be a majority in the 650 seat House of Commons; conversely if the Conservatives win 35%, they fall significantly short 6:
When in opposition, this has translated itself into the "35% Strategy" - that is, Labour can let the government tie itself up into
knots, as long as they continue to hold onto their core support. To put it another way, 'give them enough rope and they'll hang
themselves', because the governing party have to take action and enact policies. So Labour can just sit quietly, avoid any
pitfalls, and then ramp up their efforts into the election. Or so they thought, before the SNP bombshell hit them....
6
May2015.com
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
3. What could the number of seats look like?
Given that it is difficult to predict how the vote share translates into seats, there are a few websites that contain complex
mathematical modelling to try to make a forecast. www.electionforecast.co.uk. Chris Hanretty, University of East Anglia
http://forecastuk.org.uk/
looks at how votes change in the run-up to an election, giving ongoing probability of various outcomes
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
http://www.electoralcalculus.co.uk/
They were the most accurate pre-poll predictor at the last general election. Along with the seats predictor, they also look at
the probabilities of various outcomes
They have also created a matrix, so that you can compare levels of Labour and Conservative support and quickly discover
which kind of government might be the outcome (current polls are the blue dot in the middle, suggesting a Labour/SNP
coalition):
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
It is all very well to make up countless mathematical models, but as we know, it comes down to the people who put their
money where their mouth is. It's a small market on betfair at the moment but this will increase as we move closer to the
election:
http://www.betfair.com/exchange/politics/market?id=1.115878540
This shows the current odds on the Next Government, which at the moment suggests a Conservative majority is almost twice
as likely as a Labour majority:
Although you can see that there are equally similar odds for a Conservative minority, a Labour minority, and indeed, "any
other government"!
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
4. What kind of government?
There is a further wrinkle to all of these predictions. There are three kinds of government we could have:
- A coalition
We already know about this one, given we already live under it. This has a formal coalition agreement, drawing up policies
that will be agreed, and dividing up ministries so that each party in the coalition has responsibilities. Note that it may not work
like this next time, even under a formal coalition. The Liberal Democrats have suggested that they don't want to have a
minister in every department, as they have this time, because it has been too difficult for them to flag up their own policies in
order to win support at the next election. Instead, they are looking at asking for the senior roles in just a few ministries, such
as Transport, Energy & Climate Change, and Business 7.
- A minority government
The UK has experienced these before: John Major's Conservative government in December 1996-May 1997, as he lost his 21
seat majority through scandals and by-elections; and the Harold Wilson Labour government of February 1974, which collapsed
just 8 months later. So although we have seen them, they have not been very long lasting!
- A Confidence and Supply arrangement
This is slightly stronger than a minority government. The smaller party does a deal with the main party that it will support the
government on matters of "confidence and supply". By "confidence", it means that they would vote for the government if the
opposition were to bring a vote of no confidence - meaning that the government can continue, safe in the knowledge that it
won't be brought down by a No Confidence vote. By "supply" it means bills of appropriation - in other words, the supply of
money to the economy. In practice this means that the smaller party agrees to vote for (or at least abstain from voting against)
the government's budget. So the government can carry on, safe in the knowledge it can pass its budget.
It’s unlikely that any of the smaller parties would want to commit this time to a formal coalition, given the experience of the
Lib Dems. They have seen their support collapse, and may lose up to half of their seats, despite being in government. Why
would a smaller party sign up to a coalition when it could bring about their demise at the next election?
The smaller parties also realise that a coalition gives them far less flexibility around their own policy agenda. Sure, they can
make certain demands in the coalition agreement, but once that is on paper, it becomes very difficult to change. Furthermore,
either party could renege on the agreement, as both the Conservatives and Liberal Democrats would argue has been the case
in the current government. Is it worth the hassle? Nigel Farage’s view on this has been echoed by other smaller parties:
“To sell out so that one or two people can have ministerial positions is not what UKIP is about” 8.
7
8
http://www.independent.co.uk/news/uk/politics/lib-dems-want-to-have-their-own-ministries-in-any-new-coalition-9845455.html
http://www.dailymail.co.uk/news/article-2789116/we-win-nigel-farage-comes-fighting-hits-campaign-trail-tory-defector-mark-reckless-rochester-strood-election.html
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
5. Who would work with who?
Smaller parties are starting to make demands now about the price for their support. This fact in itself shows you just how close
this election has become.
UKIP
Although UKIP are gaining support from both the right and the left, their key policy focus is to take the UK out of Europe. As
such, their stated price for support has been an EU referendum, as soon as possible, whatever it takes.
As the Conservative party have already promised a referendum in 2017, the price for UKIP support would be to have a snap
referendum on the EU - which means that the vote could happen as soon as this summer!
'Ukip MPs would support the Tories in the event of a hung Parliament under a confidence and supply arrangement in exchange
for an in-out referendum being brought forward by 2 years' 9
As the Labour party have ruled out an EU referendum, UKIP have said that they would do a deal with him if he recanted on this
pledge:
'The pressure on Ed Miliband to pledge a referendum is enormous. If ...there’s a hung parliament then we could do a deal with
Mr Miliband' 10
SNP
The Scottish Nationalists represent many Scottish voters' core belief, which is that the Conservative party must be kept out at
all costs. There is a visceral hatred of the party, ever since Margaret Thatcher made significant changes to the economy in the
1980s. Hence the leader of the SNP, Nicola Sturgeon, in her first speech as leader pledged: 'the SNP will never, ever, put the
Tories into government'11. Should the SNP be Kingmaker, however, don't discount anything. Politicians can become very
pragmatic if they sense that they can get what they want from the other party.
The SNP have also made the abolition of Trident (the nuclear deterrent housed in Scotland) a key policy pledge.
The Northern Irish Parties
These parties may be more pivotal than they are given credit for. After all, they are currently the fourth and sixth largest
parties in the House of Commons:
9
http://www.telegraph.co.uk/news/politics/nigel-farage/11157230/Farage-July-2015-referendum-is-my-price-for-propping-up-Tories.html
10
11
http://www.mirror.co.uk/news/uk-news/ukips-nigel-farage-ill-offer-4422291
http://www.bbc.co.uk/news/uk-scotland-scotland-politics-30061564
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London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
The DUP (Democratic Unionist Party, right of centre economically) has said, unsurprisingly, that it wants more financial
support for Northern Ireland 12. Labour's Northern Ireland minister has already warned the DUP not to strike a deal with the
Tories 13.
Sinn Fein have said they are not discussing a deal with Labour, and would continue their abstentionist policy, whereby they are
elected MPs but refuse to take their seats in Westminster 14(given they want to unite Ireland as one republic).
Green Party
Their policies span from a basic citizen's income for everyone, to a refusal to join the Euro 15. They have said that they won't
support anyone, instead voting on a case-by-case basis 16.
12
13
14
15
16
http://www.bbc.co.uk/news/uk-politics-30396237
http://www.theguardian.com/uk-news/2014/nov/26/northern-ireland-labour-dup-voters-deal-tories
http://www.theguardian.com/politics/2015/jan/28/sinn-fein-denies-considering-post-election-deal-labour
http://greenparty.org.uk/archive/53.html
http://www.theguardian.com/politics/2015/jan/18/green-party-citizens-income-natalie-bennett-benefit
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
1+1+1....
It may be that we end up with a "rainbow coalition" of more than two parties. Then comments such as the one from Nick
Clegg (Liberal Democrat leader and Deputy Prime Minister) that he wouldn't sit in a cabinet with UKIP 17, become more
significant. Alex Salmond, who looks likely to enter parliament as an MP and would be the leader of the SNP in Westminster,
has said that the SNP would work with Sinn Fein or the DUP but not the Tories 18.
6. EU Referendum
If UKIP were to form part of any administration, then expect an EU referendum to be brought forward. The Greens are also
keen to renegotiate the UK’s relationship with the EU, given their focus on localism and the importance of sustainability rather
than free trade. The SNP have said that on any EU vote, each UK region would get its own veto – so Scotland, England,
Northern Ireland and Wales would each vote on whether to remain in the EU 19.
It’s clear that the UK’s relationship with Europe will be a key topic of debate whoever wins the election. 20
Ipsos Mori has one of the longest running polls on whether Brits want to stay in the EU 21 and in the past two decades it has
consistently shown that we want to stay in, aside from the period covering the EU sovereign debt crisis:
17
18
19
http://www.dailymail.co.uk/news/article-2916071/Clegg-defies-polls-says-d-make-deal-Dave-Ed-dismisses-predictions-party-lose-half-seats.html
http://www.bbc.co.uk/news/uk-politics-30424810
http://www.snp.org/media-centre/news/2015/feb/scotland-must-not-be-dragged-out-eu
202020
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
This suggests that the state of the EU economy at the time of the vote would be very decisive for how the vote would go.
With UKIP consistently polling 15%, and now with two MPs courtesy of two by-elections that the MPs themselves deliberately
engineered, it looks as though Britain maintains a steady streak of Euroscepticism. However, UKIP voters are often motivated
by other factors, and it’s notable that UKIP’s success has come at the expense of Labour as well as the (allegedly more
Eurosceptic) Conservatives. In a less well-reported by-election last year, UKIP didn’t win, but they came within 617 votes of
beating the Labour candidate in what was considered a safe Labour seat 22! This led the leftist Fabian Society to produce a
report on “Labour’s UKIP problem and How it Can be Overcome”, with a list of 16 ‘critical’ Labour seats that could be
vulnerable to losses 23.
7. Timeline
At the last election, held on Thursday 6th May 2010, it was clear that no-one had an overall majority by midday on Friday.
Coalition talks then began, with an initial attempt made between the then Prime Minister Gordon Brown and the Liberal
Democrats. But they would have needed some of the other parties to join them for the numbers to work. The Lib Dems were
also negotiating with the Conservatives, and on Monday 10th May, Brown stepped down as Labour leader, and resigned as
Prime Minister the following day. After tendering his resignation to the Queen, David Cameron became Prime Minister one
hour later after being called to Buckingham Palace. By midnight of Tuesday 12th May, the Lib Dems announced that the
coalition deal was approved by their Federal Executive and the parliamentary party, and later on the 13th May the coalition
agreement was published. In essence then, it took 5 days after the election for there to be a new government.
This time around, if it is once again a hung parliament, everyone agrees that the process would be much slower.
1. The background to the 2010 election was much more febrile, with the financial crisis still lingering, and the
markets in disarray with rioting on the streets in Greece as they faced a bailout. Therefore the politicians knew
that they had to get a deal done quickly, or face destabilising the markets. This is why Cameron went for a
formal coalition rather than a minority government, as he felt that confidence in the UK could only be
maintained if the new government were bound together strongly (this is also why he created the Fixed Term
parliament act)
2. If markets are relatively stable, this means that various coalitions or minority government combinations could
be discussed before a final agreement is reached. Last time around, a coalition government was considered so
unusual that “something had to be done, and quickly”
3. The Liberal Democrats have suffered such a dramatic reversal of fortunes that any smaller party who becomes
a “kingmaker” would stick much more strongly to their guns to get what they want
4. Depending on the outcome, several parties may end up changing their leader in the aftermath! This is a
significant risk for the Liberal Democrats (where Clegg is blamed for the party’s implosion of support),
21
https://www.ipsos-mori.com/researchpublications/researcharchive/3463/Support-for-EU-membership-highest-for-23-years-even-as-UKIP-rises-in-thepolls.aspx#gallery[m]/1/
22
http://www.theguardian.com/politics/2014/oct/10/labour-scrapes-byelection-victory-ukip-heywood-middleton
23
http://www.fabians.org.uk/revolt-on-the-left-labours-ukip-problem-and-how-it-can-be-overcome/
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
Labour (where Ed Miliband is criticised for failing to capitalise on his lead), and even the Conservatives
(where David Cameron will soon become one of the longest serving party leaders, yet has failed to deliver a
majority government). Depending on the party, that could take time, as some of them need to convene a vote
of all of their members to choose a leader.
The process should therefore be expected to take a matter of weeks, rather than days.
It is also possible that there may be a second election. This is much harder to achieve since the passage of the Fixed Term
Parliament act, but not impossible. Under this act, the UK Prime Minister lost their right to call an election at a time of their
choosing, within the 5 year period of a parliament. Instead, it is fixed at 5 years, unless 24:
• a motion for an early general election is agreed by at least two-thirds of the whole House or;
• a motion of no confidence is passed and no alternative government is confirmed by the Commons within 14 days.
The first of these conditions would be unlikely, as it would require two-thirds of MPs to vote for an early election – and why
would most of them ask for the voters to go to the polls again, if the voters didn’t much like any of them first time around?
The second would be the more likely route. This is why the concept of “confidence and supply” is so important to a minority
government. If the minority party can rely on winning a vote of no confidence because of the support from its “confidence and
supply” parties, then it should be able to continue.
Confidence votes happen all the time – the Queen’s Speech and the Budget are in fact votes of confidence in a government.
An outright vote on “This House has no confidence in Her Majesty’s Government” is rarer, but they have still taken place. The
most famous is the one brought by the opposition in March 1979 which brought down the Labour Government by one vote.
John Major used a confidence vote successfully in 1993 so that he could pass the Social Chapter of the Maastricht Treaty 25.
The minority government of February 1974 led to a second election just 8 months later – when the Labour Party managed to
win a majority, but of only 3. So even a second election may not lead to a government that is significantly stronger.
Either way, the uncertainty this time around is likely to end on Friday May 8th 2015.
24
25
http://www.parliament.uk/business/publications/research/briefing-papers/SN06111/fixedterm-parliaments-act-2011
http://en.wikipedia.org/wiki/1993_vote_of_confidence_in_the_government_of_John_Major
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
8. Impact on the markets
 GBP volatility
Given the uncertainty over the result; the type of government; the time it will take to form that government; and its stability,
GBP volatility should remain at a premium for the months following an election. With regard to the EU referendum, which
currently would take place in 2017 under a Conservative government (but may be brought forward if UKIP were involved),
EUR/GBP vol in particular should remain at a premium.
Both the level of vol and the skew should rise – GBP puts saw a spike in demand over the Scotland referendum:
At the moment you can see that puts are more expensive than calls. Here is a chart of EUR/GBP puts vs calls – the blue line
(puts) is above the yellow line (calls) on this chart, but this could become even more pronounced:
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
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This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
There is now an election “kink” in the curve – with the peak at 6months (August expiry). However the uncertainty may not
fade away after that, and arguably the 3month point, when the election actually takes place, is currently relatively low. There
will be many opportunities to play this curve going forward.
As for the absolute level of vol – here is a chart of EUR/GBP 6 month vol, which has understandably been climbing since the
end of last year. Not only are UK risks rising but the ECB and Greek elections are raising the stakes for Europe too. It is still
below the highs of the Eurozone debt crisis, when it reached 13%, so again there is potential for opportunities here:
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
 Delay to BOE rate hikes
The Bank of England will most likely wait until the dust settles before responding to a new administration. As it currently
stands they appear to be patient about delivering the first rate hike; any kind of volatility or uncertainty and this patience
looks set to be extended. Therefore it looks unlikely that there would be any hike before September, given the need for a new
administration to bed in.
This means that the spread between June and September short stg contracts should remain zero. This spread has indeed been
narrowing over the past few months as rate hikes have been pushed out. It is worth continuing to watch for a specific election
trade, as any rally in the spread as we move closer to the May date should be sold:
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.
 Risk premium for Gilts
Gilts will be hit by three factors in the event of a hung parliament:
1. What will fiscal policy look like? Although the three main parties (Conservative, Labour and Lib Dems) are
relatively similar from a market perspective, they may all be forced to compromise if they do a deal with
some of the smaller parties. If Labour are forced to join up with the SNP, the Northern Irish parties and/or the
Greens, then their natural tendency to “tax and spend” will tack further to the left wing, creating a more
expansionary fiscal policy (The regional parties tend to want more spending to flow to their own area). That
would see Gilts sell off, with more supply expected.
2. The EU referendum risk: What would a Gilt be worth if the UK were no longer in the European Union? What
would that mean for the UK economy? It will be tough for international investors to believe that it is an
unambiguous benefit, and as such Gilts should suffer.
3. “Safe Haven” status revoked? UK assets, not least UK property, has been the major beneficiary of turmoil
elsewhere in the world. The rule of law, long history of stability, and predictable politics have always seen
money flow into the UK. If the politics suddenly became more confusing, or the UK was thought to be
leaving the EU, then it would look a lot less stable. Again, this is a risk for Gilts.
If Gilts were to come under pressure for all of these reasons, then this again might feedback into the Bank of England’s
calculations. Could they afford to hike if the market were selling off?
There is a worst-case scenario where they may have to hike: if the UK were to suffer significant capital outflows, and given the
current account and trade deficits, the currency came under pressure. Then they might have to hike to protect the currency.
IN CONCLUSION….
This General Election is certainly one of the most unpredictable for decades. One last thought to leave you with….. if the
markets became volatile, and a minority government were propped up by some of the regionalist parties, many voters may
decide that they prefer stability over anything else. Once they are faced with putting their cross on the ballot paper, all their
bravado over “giving a black eye to the government because my life hasn’t got any better” might be put to one side. After
hovering over the UKIP or Green Party box, they might instead decide that the last guys haven’t done such a bad job after all,
and why risk it? This effect could particularly dominate if the economy improves into the election – or indeed if the feel-good
factor from cheaper petrol gives people more money to spend. Ultimately, then, the more panic over a rainbow minority
government, the more likely we are to be delivered a more stable majority government.
Helen Thomas
Senior Consultant
In Touch FX Limited
[email protected]
InTouch Capital Markets provides institutional level market information and training services for the fixed income & rates markets
London: +44 (0)20 8879 1234 l New York: +1 212 878 6685 - www.itcmarkets.com
This document and materials within are for informational purposes only. Its purpose is not to solicit, offer or facilitate a decision to buy or sell any financial instrument.
In Touch Capital Markets Ltd does not warrant the accuracy or completeness of this information. No liability is accepted by it or the sender for any error or omission, nor
for any loss of business, profits or any indirect, direct or incidental damages arising from the use of this information.