The economic and personal finance implications of our first hung parliament since 1974 are still sinking in.
It has been difficult to accurately judge the reaction of the markets in isolation since the election results on Thursday night and Friday morning. The news of a hung parliament, which had already been priced into markets to some extent, was overshadowed by extraordinary market movements in the US and the continued threat of Greek contagion within Europe.
Last week saw the Dow Jones Industrial Average plummet by almost 1,000 points briefly on Thursday. It has been widely reported that this was caused by a trader pressing the wrong key on his computer. Instead of pressing the ‘millions’ button, he accidentally pressed the button for ‘billions’.
This has prompted the U.S. Securities and Exchange Commission and major trading exchanges to consider some form of market-wide ‘circuit-breaker’ protocol in order to prevent an error of this magnitude having such a widespread impact again.
Late last night we had the news that the European Union has put together a rescue package worth over €750bn. This is aimed at preventing the Greek government bond crisis from spreading to infect the likes of Portugal and Spain, and then onto Ireland, Italy and the rest of Europe.
Whilst not a Eurozone country, Britain has exposure of up to €8bn from this rescue package should there be a 100% default. Some in the UK might view this contribution to bail out another currency as unfair, although it should prevent a new global financial crisis that would have hit Britain, and taxpayer owned British banks, especially hard.
With a hung parliament, parties negotiating to form a coalition government and the British political system in a state of limbo, some will consider a €8bn contribution to the Eurozone rescue package as a lucky escape.
It has been a positive day for the stockmarkets, with the FTSE 100 index of leading UK company shares up 264.40 points or 5.16% today, closing at 5387.42. Banking shares were the biggest daily winners, with Barclays up 16.18% to 329.60p and Lloyds Banking Group up 13.95% to 61.00p.
We expect to see the markets and Sterling display volatile characteristics over the coming days.
The news that Gordon Brown will bow out gracefully, at some point later this year, in order to pave the way for a Labour – Liberal Democrat deal sent Sterling lower against the US Dollar, with the pound falling to $1.4858 from $1.4920 before this announcement was made.
The markets do not want to see a Lib-Lab coalition. It would mean a potentially unstable government and that is something the UK economy cannot risk at the moment. With economic recovery still in a fragile state, confirmed with the news today that the Bank Rate remains on hold at 0.5%, the markets want certainty, clarity and decisive action.
For investors, there is no easy option for the short term. The sharp correction we witnessed today after stockmarket falls last week show that trying to time the markets is a strategy filled with risks. There is as much chance that you will miss gains as there is you will avoid losses.
Investors are best advised to remain invested for the long-term, focus on their investment strategy and avoid emotional reactions to short-term factors. It looks set to be an exciting week or two.
