In one of the biggest electoral shocks since the 1970s, Theresa May’s Conservative party has emerged as the largest party in the next parliament but has lost its majority after an unexpectedly strong showing by the Labour Party under Jeremy Corbyn.
A Labour-led progressive alliance is possible but we expect the Conservatives to form a minority administration reliant on a confidence and supply arrangement with Ulster MPs. This will not be a strong and stable government, so another election is likely to follow after a short period under a new Prime Minister, perhaps in the autumn.
The UK will have a weak government with no clear mandate heading into Brexit talks, the exact opposite of what Theresa May intended when a 20-25% polling lead tempted her to call the snap election.
Markets don’t like uncertainty. We are likely to see bouts of political risk aversion like those after the Leave vote in last summer’s EU referendum but on a smaller scale, with sterling weakening, gilt yields dropping and mid cap stocks underperforming the more international FTSE100.
Longer term, it is harder to call. The need to compromise in parliament may lead to a softer Brexit stance than would otherwise have been the case and this could ultimately end up positive for the pound.