Election announcements make good theatre. A rushed press conference, lectern in the middle of Downing Street, searing Prime Ministerial looks and boom – a snap election for June 8.
In years gone by, such uncertainty was a source of material volatility to all markets, especially bond markets, and certainly worthy of more than the 5bps of volatility that we saw in gilts yesterday. But this gives us a clue to what is going on.
The volatility we saw at the end of June and July 2016 was obviously Brexit driven. What calmed markets was the swift resolution to the power vacuum, the UK proved resilient and institutional stability prevailed.
The action was all in the currency market with the c15% fall in sterling against the dollar on a trade-weighted basis. And so it was yesterday too: the action was in currency with a push to $1.28 and a cent on the euro exchange rate. There is no institutional uncertainty in Theresa May’s announcement – quite the opposite. It is a grab for power via a larger majority in Parliament with the desire to deliver the Brexit she sees fit and not one she has to discuss and share with Remainers nor hard Brexit Tory backbenchers. All very calming for the bond market.
There are clearly risks, though. Jeremy Corbyn is elected? Low. UKIP? Now Article 50 is triggered their raison d’etre has been removed. A resurgent Liberal Democratic party retaking Tory seats? More likely but the old Lib-Dem heartlands were in the “Leave” voting South-West. Scotland? Here we have the fourth general election or referendum in four years but despite the SNP’s push for IndyRef2, they are likely to face the Unionist challenge and lose Westminster seats. In short, the gilt market is comforted by the 20 point lead for the Tories in the opinion polls and expect June 9 to be business as usual but emphatically so.
As it stands today, politics are not a driver of material gilt market volatility. The action is in the currency markets and the currency-sensitive FTSE. An increase in gilt market volatility is most likely driven by non-domestic factors.