Dabbl Finance School

Theresa May and the Markets.

April 20, 2017

There’s a line that is often tossed around the financial world, and that’s around how much the markets detest uncertainty. We saw a good example of this on Tuesday morning when Downing Street announced that the Prime Minister would be making a statement from the steps of No. 10 at 11.15am.

This is a rare event and typically means one of two things. Either the country is to hold a general election, or the Prime Minister is to resign. Neither seemed likely – there was nothing to suggest that after nine months at the helm the PM had decided to call it a day, whilst Mrs May also pledged several times since taking office that she wouldn’t be calling an early election.

When the announcement arose that a statement was on the cards, the value of the pound immediately fell. As traders had no idea what this statement would contain, they reduced risk by selling the pound. Within 15 minutes, rumours were circulating that a snap general election would be called and the currency started its recovery. By the time Ms May walked out of the front door, (a few minutes earlier than had been planned), the City believed it knew what was happening and the currency marched its was back to a six month high. Not only had the uncertainty been removed, but the financial markets liked what this meant in terms of the Brexit negotiations.

Chart showing reaction of pound against the US dollar on Tuesday morning:

So, if this was such good news, why did the FTSE-100 index collapse, falling from 7328 to 7158 during Tuesday?

The vast majority of shares that make up the FTSE-100 are now held by overseas investors, so a strengthening pound gives them cause to sell out.

Income within these businesses is often generated in dollars, so the stronger pound means profits don’t look as healthy. But expressed in US dollar terms, UK share prices were little changed on the day.

Take Royal Dutch Shell for example. On Tuesday morning, its shares were trading for £20.94. By Tuesday afternoon they were worth £20.50. If you were an overseas investor buying these shares with US dollars, the price barely moved, falling ever so slightly from $26.32 to $26.24.

The market seems to have decided that the general election will provide a landslide victory for Theresa May. Any shift in opinion as the next seven weeks of campaigning unfolds will give traders fresh cause to sell off shares – as we have seen quite clearly, they are no fans of uncertainty.