What May’s snap election call means for banks

  • By Christian Edwards

British Prime Minister Theresa May has said she will take her country to the polls on June 8, triggering a fresh ripple of uncertainty in financial markets at home and abroad.

The UK’s Conservative Prime Minister yesterday announced that she will call a snap election for the second week of June, in a shock move to further strengthen her position and secure a fresh mandate before vaulting into talks on exiting the European Union.

Parliament is likely to be dissolved on May 3, which will allow for a short, sharp election campaign just over a month long. May is banking on her significant lead in the polls – two British surveys over the Easter weekend gave the Conservatives a more than 20 point buffer.

May’s call reversed her earlier stance and the snap election will have an ongoing impact on markets worldwide, and in Europe where surprises from Britain are least appreciated. Polls have now been called - or are expected to be called shortly - for each of the region's four largest economies.

Ongoing political uncertainties

This year, due in large part to ongoing political uncertainties, each of the region's major equity benchmarks remain well behind the bustling gains of the S&P 500. Germany's DAX is up 4.8 per cent; France's CAC 40 is up 3 per cent; Britain's FTSE 100 is up 0.9 per cent and Italy's FTSE MIB is down 3.7 per cent.

European government bond yields, on the other hand, have been backed stiffly through ongoing purchases from the European Central Bank and the Bank of England as part of their quantitative easing programs.

The UK’s headline growth has stayed the course since last June’s Brexit decision. GDP grew by 0.5 per cent in the third quarter of 2016 and then surged - by European standards - to 0.7 per cent in the final three months of the year.

The most recent predictions from within Britain’s Office of Budget Responsibility and the Bank of England is for the economy to expand by two per cent in 2017.

Reports of the demise of the British pound are also appearing wholly premature this week

In reports from Berlin, the normally Pound-pessimistic Deutsche Bank, has performed a fiscal U-turn to declare the end of its long-held, “structurally bearish” stance on the UK’s currency.

Referred to as “one of the most pessimistic financial institutions on the pound since Britain voted to leave the European Union”, Deutsche’s global co-head of FX research, George Saravelos Deutsche’s said the snap election is a “game-changer”.

In a note, Tuesday, Saravelos said Deutsche has been “structurally bearish on sterling for the last two years but are now changing view. We are closing out all our bearish FX trades.” The German banking powerhouse said it plans to review all sterling forecasts “in coming days”.

Bank lobbyist departs

Santander, Spain's largest bank and one of the eurozone's two biggest, was in the middle of raising funds through a long-telegraphed bond sale when news of the British election struck, with reports suggesting the bank only managed to secure well under half of its targeted 2 billion euros.

Britain was until recently the main market for Santander for profits but fell into second place behind Brazil at the end of last year with Brexit and a weaker pound knocking earnings in Britain by nearly 15 percent.

According to the French newswire Agence France Presse, Santander raised barely 750 million euros by selling bonds.

And the snap election may have rolled its first head, with reports from London suggesting Britain's top bank lobbyist Anthony Browne will quit his tenure as chief executive of the British Bankers' Association (BBA).

It is unconfirmed as to whether Browne will also step aside in the race to become the first top executive of Britain’s new peak body - “UK Finance” - a sparkling new, broadly-powered trade body being built on the bones of the former BBA, the British Council of Mortgage Lenders and other financial sector peak organisations.