UK political risk looks under-priced – RBS

FXStreet (Barcelona) - Ross Walker, Senior UK Economist at RBS, argues that there is little clarity in the financial markets regarding how the UK constitution would function as the probability of a hung parliament remains strong.

Key Quotes

“Although there is a widespread expectation of a hung parliament there appears to be little clarity in financial markets over how the UK constitution would function in this eventuality and which party/parties would form the government.”

“The incumbent Conservatives would have the first opportunity to form a government but it is far from clear how a majority coalition on the centre-right could be formed. ‘England does not love coalitions’ opined Disraeli – something seemingly borne out by polling data a century-and-a-half later – but a minority government might well prove an even less desirable outcome for markets.”

“British government is about to become much less stable and predictable – and with a significantly weaker mandate.”

“The extent to which this unsettles financial markets remains to be seen, but the risks feel under-priced – perhaps because there have been bigger issues this year (ECB QE, Fed rate hike timing, oil price movements); perhaps because market participants do not feel sufficiently confident about the UK political process.”

“Last year’s Scottish referendum provides a stark warning against complacency and that markets can move abruptly, even at a late stage, in response to political developments.”