Market sell-off fears over political impasse

Sunday, May 9, 2010
By Paul Martin

Traders are braced for a sterling sell-off on London markets today after the failure of Conservative and Liberal Democrats to finalise a deal to form a coalition government.

By Roland Gribben
09 May 2010

Analysts hoped that EU moves to agree a €500bn-plus (£430bn-plus) emergency funding package for vulnerable eurozone economies, including Greece, would cushion fears over policy drift in a hung parliament.

The EU deal was agreed last night hours after finance ministers declared war on the “wolf pack” behaviour of financial markets attacking the euro.

Analysts and business leaders warned that time is fast running out to provide reassurance that a new administration is ready to tackle Britain’s £163bn budget deficit and fill the political vacuum.

Howard Archer, chief UK and European economist at IHS Global Insight said failure to produce a formal agreement would leave sterling, the FTSE and gilts “vulnerable to a major sell-off” today.

He acknowledged the mood would be influenced by the EU manoeuvres and whether markets perceived that the current political “horse-trading” in the UK produced a government “that will be able to survive for a decent amount of time and deliver meaningful action on reining in the UK budget deficit”.

Paul Kavanagh, a partner at stockbrokers Killik & Co, said: “Everything is still nervous and volatile but I would have thought the situation in Europe is going to weigh more heavily than the talks on coalition government. The markets are saying Europe has had a long time to sort this out and you’ve got to give us something constructive and tangible.”

The FTSE 100 slumped 4pc at one stage on Friday before finishing 137.97 points down at 5,123.02 in the immediate aftermath of the election outcome. Sterling lost more ground against the dollar and the euro but Stephen Hughes, director of Foreign Currency Direct sees the pound strengthening against the euro on the back of the EU deal and reaching €1.20 by the end of the month.

David Frost, director general of the British Chambers of Commerce, said: “Our members are telling us they want an early resolution and clear leadership and who is going to occupy No 10 and No 11. But we don’t want something cobbled together that will fall apart in a few weeks time.

“There must be a clear understanding from the start that we need to focus on getting the deficit down and putting business at the heart of the economy.”

Richard Lambert, CBI director general, was more relaxed about the coalition timetable. “We have been in a period of political uncertainty for some weeks and another day or two may not make a difference but the longer the uncertainty is extended the greater the risk of consequences in financial markets,” he said.

Stephen Radley, a senior executive with EEF, the manufacturing organisation, commented: “To some extent it doesn’t really matter whether we see a coalition or something informal but what we need is a government producing a credible budget in the next month.”

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