A Labour coalition government: bullish or bearish for GBP? - Nomura

Analysts at Nomura suggested to never underestimate the possibility of a surprise in politics.

Key Quotes:

"The UK snap election was not expected so why should its result be so pre-determined?

As the polls currently stand a Conservative majority is the most likely outcome. However, that lead is falling and there is still time for polls to narrow further. If this trend continues at its current pace we would not rule out the possibility of a hung parliament, even if very slim.

It is therefore prudent to examine what a Labour coalition government would look like and there are some interesting conclusions."

In this election Mrs May’s Conservative Party is pitted against one of the most leftleaning Labour leaderships in generations.

From our perspective (macroeconomics and markets) the most important differences in Labour’s manifesto relative to the Conservatives relate to Brexit (on the softer, more conciliatory, end of the scale) and higher tax and spend with the likelihood of higher deficits.

For the Gilt market outlook if Labour wins the election, higher Gilt yields are the obvious conclusion thanks to a combination of a) fiscal easing lifting growth and inflation expectations, b) more substantial levels of issuance, and c) Brexit plans reducing the chances of a hard exit or cliff-edge.

For GBP, we think at first it would head lower as increased uncertainty would lead to reduced inflows, but as austerity would be removed and “softer Brexit” hopes would return higher real yields may offset this and GBP would be higher."