Last week's U.K. elections, which saw conservatives lose their voting majority in Parliament, may have delivered a hammer blow for a hard Brexit exit, some global market gurus say - and that would have a big ripple effect on world-wide stock markets.
The election results come at a time when British Prime Minister Theresa May is forming a coalition with the Democratic Unionist Party (DUP) and as she visits Buckingham Palace to ask permission from the Queen to form a government.
"Now, Mrs. May no longer have the ability to deliver on this as she did even 24 hours ago, for two key reasons," says Nigel Green, founder and CEO of deVere Group, one of the world's largest independent financial services organizations.
"First, the British people have spoken and largely rejected much of the Conservative manifesto which championed a hard Brexit," he notes. "And second, the leader of the Democratic Unionist Party, which is joining forces with the Conservatives to form a coalition government, have said they will not back a hard Brexit."
The financial markets had almost already priced-in a hard Brexit and will now have to quickly reassess their position, Green notes. "As this adjustment takes place, we can expect the uncertainty in the financial markets not only to continue but to intensify," he says. "That's because the electorate's vote means the U.K.'s power at the Brexit negotiations is now likely to be relatively weak. This further complicates the talks, due to start on June 19, and combined with the markets' readjustment, means we're entering turbulent waters in the short term."
Unsurprisingly, the initial impact is a political one, but the U.K. votes will lead to a ripple effect in global financial markets, experts say.
"This is a major blow to Prime Minister May," says Alan Robinson, global portfolio analyst at RBC Wealth Management. "It will solidify opposition to her from within her party. This in turn will likely strengthen the influence of the Hard Brexiteers, and present stronger headwinds to the U.K. economy."
Data-wise, the initial economic and market response to the U.K. vote has been "negative," according to Erik Norland, senior economist at CME Group. "The currency has fallen nearly 2% versus the dollar and the euro on the news of a hung Parliament," Norland says. "This returns the pound to the center of its post-Brexit referendum trading range of 1.18 - 1.34."
Longer term, the outcome might not be as negative for the U.K. currency as the initial reaction suggests, he adds. "One positive for the currency is that the result throws Brexit into doubt. The pound fell 21% between the time two exit polls erroneously predicted a Remain victory and the pound's ultimate low versus the U.S. dollar. As such, anything that throws doubt upon Brexit should be positive for the currency."
Others say that non-conventional uncertainty over Brexit will vex market investors going forward.
"There's a popular idea that markets hate uncertainty, but that's just false," notes Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds. "Markets have thrived on uncertainty. It's uncertainty about the future that often creates differences of opinion, differences of perceived value, and that's how you typically get trading and price discovery. What markets have not liked is the certainty that things are going to be bad."
Jacobsen says that is why he is "not worried" about some of the new uncertainty around what type of government is formed as a result of the UK general election.
"It seems likely that whatever government forms, it will take a softer approach to Brexit than what Theresa May was pushing for," he explains.
"But a softer Brexit could be positive for the long-term-for Europe and the U.K. - even if the initial market reaction was that the pound dropped nearly 2% on the early news," Jacobsen adds.
Overall, the uncertainty around who will lead the government may weigh on business sentiment, but this will likely be resolved rather quickly, Jacobsen adds. "It's unlikely things will turn out like in Belgium, where they didn't have a ruling coalition government for 589 days during 2010 through 2011," he says. "Of course, Belgium's economy did pretty well during that time, so maybe political limbo isn't as bad for sentiment and economic activity as one might originally think."
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