If there’s one thing financial markets react to – it’s uncertainty. It can generate huge volatility in stock markets. And when you’re looking for uncertainty, it doesn’t come much bigger than the snap General Election on June 8th that’s been instigated by Theresa May. For experienced traders and investors, this can create excellent opportunities to benefit from short-term gains.
As soon as the Prime Minister announced her decision to hold a vote on a snap General Election, markets in the UK plunged, with the FTSE 100 finishing the day 2.5% down. The injection of uncertainty into the financial landscape has put investors on edge, which in turn causes them to re-evaluate their strategies and adopt a more cautious approach.
Sterling and stocks
Sterling, on the other hand, bounced 2.2% in the same period. The two – Sterling and big company stocks – are inextricably linked. Savvy investors are acutely aware that a falling Pound could be good news for UK large-caps such as those on the FTSE 100, since so much of their operating revenue is derived overseas and then converted back into Pounds in the UK, so they’re effectively getting more Pound for their USD, their Euros and so on.
This has very much been the case since the Brexit vote. Investors reduced their appetite to pile money into the UK, given its uncertain future, thus dragging the value of the Pound downwards and elevating the stock prices of the biggest global firms in the UK.
We can expect further volatility in the currency exchanges, particularly the EUR/GBP and GBP/USD, as well as in the major equity UK indexes, between now and June 8th. There will no doubt be much political rhetoric and media noise to sway investor sentiment. And much of this will inevitably centre on Brexit.
You could argue, in fact, that this isn’t really a General Election at all. Many pundits see this Election as a precursor to the Brexit negotiations. Or even a second Brexit vote, which could determine the mandate the government has with which to enter those negotiations.
Some believe that a landslide Tory victory in the Election could pave the way for a hard Brexit. This might in turn mean complex new trade relations between UK and European firms and reduced movement of cheap labour into the UK to service certain businesses, such as those in the entertainment and hospitality sector. Or it may give the UK government a stronger hand when negotiating those trade deals for UK firms. Any other kind of Election result might make it more difficult to attain such a severe cut-off from the EU or secure good deals for UK companies.
But this is all conjecture, of course.
Looking for clues
Over the coming weeks, investors will be eagerly tracking all manner of media sources and economic reports as they search for clues as to how the Election may pan out and, more importantly, how it will affect currency values and stock prices.
History tells us that financial markets can certainly ebb and flow in time to pre-Election opinion polls. But that doesn’t necessarily predict the post-Election market movements. We have two good recent examples of this. Firstly, the Referendum last summer. Many commentators expected a significant crash in markets in the event of a win for the ‘Leave’ vote. So far, we’ve seen anything but. Secondly, the US Election. The Trump victory initially dented investor confidence and US markets struggled but they very quickly bounced back and have been steadily rising ever since.
In the know
It is very difficult to be an informed specialist investor on all matters related to something as large and significant as a General Election. Many factors can influence the Election and many factors will no doubt continue to shape investment markets. But with eToro, where we have a global community of six million, you can be confident that we have specialist traders and investors across many areas of expertise, from short-term trading in Bitcoin to long-term investing in bank stocks.
If you’re new to eToro, why not take a look at our current crop of best-performing investors? You can track their trades, learn from their strategies, or even just choose to copy them.
All trading involves risk. Only risk capital you’re prepared to lose. Past performance does not guarantee future results. Trading history presented is less than 5 years and may not suffice as basis for investment decision. This post is not investment advice