Teresa May fails to retain majority at general election

Bloombergs, 9 June 2017.

British voters just served up the second shock at the ballot box in the space of a year.

Dreaming of securing a landslide win, Prime Minister Theresa May called an election three years earlier than she needed to. Now her premiership might soon be over, and her Conservative Party’s outright control of Parliament has already evaporated.

The Tories are on course to win 316 seats, down from the 330 they held previously and short of the 326 seats needed for an overall advantage. They are likely to be calling Irish unionists for help in ruling.

So what does it all mean for Brexit?

For a start it likely delays the start of the divorce talks with the European Union, which had been scheduled to take place the week after next. If May clings on, as the BBC reports that she will try to do, then she will need to build a new government. If she fails then the Tories will have to find a new leader.

Either way the U.K. is set to lose more negotiating time. The clock keeps ticking toward March 29, 2019, the day when the U.K. leaves the EU. Another election this year would provide a further squeeze.

Europeans may welcome the chaos, which could provide them with leverage, although some will be disappointed not to have a stable and familiar negotiating partner they hoped could cut deals. One thing they won’t do is extend the deadline for talks. That would risk conflicting with 2019 EU elections.
If a big win for May would have been viewed as ratifying the referendum result, her failure can be interpreted as a rejection of the hard Brexit she pursued.

Former Chancellor of the Exchequer George Osborne said as much on ITV: “Hard Brexit went in the rubbish bin tonight.”

That suggests a revamping of Britain’s Brexit strategy, likely tilting it towards trying to maintain some form of access to the same single market for goods and services that May was ready to quit to regain control of immigration. Still, those Tories most ardent about Brexit could try to limit the space for shifts.

Runners and Riders

May’s team and allies may say she has no plans to step down, but that doesn’t mean we can’t run the rule over the potential candidates to fill her shoes if she goes.

Those contenders include Foreign Secretary Boris Johnson, who made a short-lived bid for the leadership last year; Brexit Secretary David Davis has seen his stock rise in recent times and is well-liked by peers. Home Secretary Amber Rudd narrowly won re-election, and would crown a meteoric rise if she seized the crown after just seven years in Parliament. Defense Secretary Michael Fallon is the dark horse in the field, while current Chancellor of the Exchequer Philip Hammond (or “Spreadsheet Phil”) is seen as a safe pair of hands.

On the Markets

The pound slumped almost 2 percent as the likelihood of a hung parliament unnerved investors.
A Bloomberg survey of 11 banks and brokerages conducted before the exit poll showed that sterling could plunge to as low as $1.20 on Friday in the event of a hung parliament, though that is below the median forecast for a level of $1.2350.

“Confirmation of a hung parliament and the failure to have a working government in place over the coming days means that the pound could fall to as low as $1.24,” said Viraj Patel, a currency strategist at ING Group.

Still, the pound’s reaction was more muted than after the referendum.

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