A Tory Election Win Is All the Markets Can See

(Bloomberg) --

This week’s pre-election debate may have been too close to call, but for U.K. investors positioning for the December vote there’s not much doubt: Incumbent Boris Johnson remains on course for victory.

Sterling held ground against the euro while its volatility versus the dollar has somewhat eased in the aftermath of the first televised contest between the Conservative Party leader and his opponent, Jeremy Corbyn. Early polls show the Labour leader was unable to sway many voters Tuesday night, vindicating traders with bets on a comfortable Tory win.

“The debate did little to shape the view in the markets, which remains that the Conservatives are favorites to secure a majority,” said Craig Erlam, senior market analyst at trading platform Oanda Corp. in London.

There was more evidence on Thursday, when the pound held steady even after Corbyn set out a radical election policy platform. He promised nationalization across a host of industries as well as several new corporate and financial taxes, and pledged to fund free university education and care for the elderly. Johnson will unveil the Tory program next week.

For what to expect in gilts, pound after Britons vote, click here.

Even if the election brings a Conservative majority to Parliament, as expected, the Brexit quagmire looms large.

Trader conviction that the Bank of England will have to loosen monetary policy to support the economy has fluctuated in the past two days. A stronger rate-cut scenario could emerge if the new government struggles to deliver an orderly exit from the European Union.

The implied yield being below the spot rate on the December 2020 contract shows a modest bet on a rate cut.

Investors see few bumps ahead for large U.K.-listed stocks in the coming month, according to a key metric. One-month implied volatility for BlackRock Inc.’s iShares MSCI United Kingdom ETF has mostly been drifting lower since the beginning of October, mirroring the trend in the FTSE 100 Index.

There are a dizzying number of scenarios around post-election trading, including whether the Jan. 31 deadline with the EU can be met. This all has traders paying the most -- see the red peaks below -- to hedge the pound against the euro just after the election, according to options volatilities -- a surrogate for contract prices.

But for many strategists, the best weather vane to gauge the direction of the vote and Brexit is still the U.K. currency.

“If Boris’s appeal fades and Corbyn closes the gap in the polls, it will likely be felt here first, at which point the pound may turn south,” Oanda’s Erlam said.

--With assistance from Vassilis Karamanis, Richard Jones, Ven Ram and Yakob Peterseil.

To contact the reporter on this story: Todd White in Madrid at twhite2@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Cecile Gutscher, Sid Verma

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