As results flooded in through the night, revealing how the Conservative government’s decision to call a snap election had backfired, Jeavon Lolay stalked the London trading floor of Lloyds Bank taking questions from colleagues.
Like many investors in the UK and abroad on Friday, they were clear only on the issues they now face. How long can Theresa May head a party which lost its majority in an election she called to secure a strong mandate? Will a resurgence in support for the opposition Labour party shift political priorities? What does it mean for Brexit?
Yet in contrast to the shock of last June’s referendum result that triggered a plunge in the pound, the market reaction to a hung parliament was relatively contained.
“Lots of questions, not lots of action”, is how James Athey described the situation at Aberdeen Asset Management on Friday morning, where he is a senior investment manager.
“The concern is primarily about the Brexit negotiations, and how we’re going to approach them”, says Mr Lolay, with official talks on the two year process to reshape the relationship between the UK and the European Union due to start later this month.
Mrs May had committed the UK to departure from Europe’s single market and customs union, a comparatively “hard” form of Brexit. Her stance was underpinned by the threat to entirely disentangle the legal and regulatory ties which bind the country to its largest trading partner, by walking away without a trade deal.
“I don’t know if this was a vote against Brexit, but it was certainly not a vote for a hard Brexit”, says Alberto Gallo, an investor for the hedge fund Algebris.
He says he can imagine a grand coalition which leads to a more positive outcome for the UK: “Labour doesn’t nationalise the railways, the Conservatives don’t push austerity, a middle ground and Brexit softens.”
However he says the opposite is also easy to consider, in which a “weakened leader clings on to power with no credibility”.
On Friday Mrs May announced she plans to govern with the support of the rightwing Democratic Unionist party. The arrangement will give her a majority of just two votes in the House of Commons, a slim hold on power for an administration which may have to repeal and replace decades worth of legislation grounded in European law.
The duelling possibilities may explain why a drop of less than 2 per cent in the value of the pound late on Friday was the most notable reaction to the election outcome.
A hiccup compared to the financial violence which greeted the UK vote to leave the European Union, or the investor enthusiasm after Donald Trump won the US presidency, it leaves the pound right in the middle of the $1.20 to $1.34 range it has held since last year’s referendum.
Stock and bond markets were little moved Friday, and the London-listed Compass Group even announced plans to market new sterling and euro bonds, as the corporate credit market reacted to the UK’s shock election result with indifference.
Still, the lack of reaction prompted some to question the health of markets.
Matt King, a credit strategist for Citi, says the most pertinent question may be “what it takes to create a more than semi-comatose response.”
He sees the effect of support for markets from central banks around the world. “We’re obviously having extended discussions about the UK political outlook and implications for Brexit; the funny thing to me is that I’m not sure any of them help me to trade the market very much.” Clients report that even had they predicted Brexit or Mr Trump’s victory, they would have got the market response wrong, he says.
An alternative interpretation is that investors are already pessimistic on prospects for the UK, and the election has done little to change their views. “From a long term perspective, with [benchmark] 10-year gilt yields at 1 per cent and sterling near 1.2 to the dollar, markets are still priced for a lot of disruption and bad economic impact”, says Mr Athey.
Yet the stock market remains close to a record high due in large part to UK listed companies with overseas sales, which are expected to report higher revenues and profits thanks to a weaker pound.
The view of Didier Saint-Georges, a member of the investment committee at the French Asset Manager Carmignac, reflects that of some foreign investors. “We don’t own any sterling at all”, he says, but the group does own the stock of UK exporters, taking steps to neutralise any exposure to movements in the pound.
However for many investors, untangling the interplay of UK politics and economics ranks behind much bigger questions, about China’s need for commodities, or how the Federal Reserve will manage the US recovery.
“The markets are just kind of shrugging and moving on”, says David Donabedian, chief investment officer for Atlantic Trust. “There is a sense that the global economy is on its firmest footing since before the great recession.”
So if the election matters beyond the UK, it may be as part of a much bigger trend of voter revolts. George Magnus, economic consultant and associate at Oxford university’s China Centre, says: “As an investor globally, I’m counting the quarters now to the point where political uncertainty or volatility sucks the breath out of the global expansion. I suspect this will be next year”.
Additional reporting by Nicole Bullock in New York and Robert Smith in London.