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Storm Clouds Ahead as Markets Welcome New Government

With so many risks on the horizon, the euphoria of this result could fizzle out rather quickly.

For the second time in under a year we see an important UK election deliver a decisive result following months of political jostling, fanfare and voter intention polls suggesting the race would be far, far closer than it actually was. As a quick aside, it is hard to see how an inquiry into the polling data will help when UK elections are won with the backing of those all important swing and undecided voters, many of whom tend not to make their mind up until the very last minute. How can a poll of a mere one thousand people truly capture the intention of voters when some 30% to 40% of the sample is highly likely to change their mind? As most politicians seem to say, the only poll that counts is the one on election day and no truer was this today, even after the exit polls that underestimated the extent of the Conservative victory.

But back to the implications of this result for the UK and financial markets. Investors have also been voting in their numbers by buying UK equities and the pound, as they are clearly relieved to see not only a result that means the country avoids days of uncertainty with deals being negotiated between political parties, but a Conservative government that was clear to align itself with business and even won their backing in the run up to the election. The removal of this uncertainty should give consumer and business confidence a boost too, at a time when it is much needed as in the past couple of months there've been signs that the UK economy was starting to falter somewhat. So in the short term we could see further strength for stocks and sterling.

However, this may all be rather short lived as the outright Conservative majority means a greater tightening of the fiscal belt and the economy will find itself in yet another position where the private sector has to work hard to pick up from where the state is to be cut back. All this at a time when the global economy looks rather wobbly, which all combines to making it harder for the Bank of England to raise interest rates, meaning sterling's attraction diminishes as the Conservative honeymoon comes to an end.

Then of course the elephant in the room is the referendum on EU membership. Whilst it's unlikely that the yes vote (to leave the EU) will win come 2017, it doesn't make for plain sailing over the next two years. Once again, as we saw with last year's Scottish referendum and yesterday's General Election, the country will have to endure the uncertainty created that will cause great concern within the business community and dampen investor sentiment.

The final major issue that this election has thrown up is the prospect of greater Scottish nationalist influence in Westminster. The unprecedented landslide for the SNP north of the border, making them the third largest party in British politics, is something that cannot be ignored and has the potential to force the issue of a UK break up in the latter stages of this parliament.

With so many risks on the horizon, the euphoria of this result could fizzle out rather quickly.


This article does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. Any opinions made may be personal to the author and may not reflect the opinions of FxPro.

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