As the dust settles on the result of Thursday’s General Election, the ramifications are still unclear. Theresa May has managed to lead this country into a period of great uncertainty, and she must be pondering on the chaos she has unleased. Jeremey Corbyn must be a relieved man that he does not have to explain how the blank cheques he wrote during the run-up could not be paid. This election was expected to split the Labour party down the middle, it seems to have had the opposite effect. On Friday, the equity markets reaction was possibly more muted than might have been expected. The sectors exposed to the domestic economy, such as the housebuilders, consumer related and property companies were all sold. Those sectors with a more international bias helped the FTSE 100 finish the day higher, as the pound fell.
The real concern now will be, aside from the possibility of a Jeremy Corbyn led Labour party running the country, that we enter a period of stagflation. Those who lived through the period of the mid 70’s when inflation was rampant caused by constant wage demands from the public sectors as economic growth ground to a halt will shudder at the thought of what may lie ahead. The pound may come under more pressure in the coming weeks, as political uncertainty remains, pushing inflationary pressures at a time when corporations both domestic and international sit on their hands waiting to see how the effects of the election result play out. Those who look for a silver lining may now believe the Brexit negotiations will become softer, or possibly put on the back burner. Brussels must now wonder how it can possibly negotiate with such a wounded animal as Theresa May.
The movement in the gilt market in the coming week will be critical to the movement in the equity market. One thing is certain after Thursday’s result is that interest rates are not going up in the foreseeable future. However, should bond investors fear Thursday's result will lead to a period of stagflation, they will look to sell gilts.
Looking to the week ahead, aside from the ongoing fallout from last week’s vote will be the reaction to the Federal Reserve’s rate announcement. If they raise interest rates as expected, after the recent weaker economic data the equity market could fear a policy error. On the other hand, should they leave rates where they are this may suggest that they are less confident in the economic outlook. The members of the Fed may well be faced with Hobson’s choice.
Philip Hammond, who was conspicuous by his absence during the campaign delivers his speech to the Mansion House on Wednesday. He delivers his view of current and the future economic outlook for the UK economy, there must be a lot of re-writing going on over the weekend.