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April 28, 2017

The Market Sentimentalist: European Elections (Part 2) – Britain’s Re-referendum

by Amareos.

PM May surprised most people last week by announcing that the UK is to hold a snap election on June 8th. Outlining her motivation for calling an early election, something she had previously ruled out, PM May said

“[T]he country is coming together but Westminster is not”

Her concern is that such large and all-too-visible parliamentary divisions over Brexit hinders her government’s ability to get the best deal out of Brussels [1]. This all sounds very laudable – PM May putting the UK’s economic and financial interests before her personal political ambitions [2]. However, the move is not entirely selfless, it is also sound politics.

According to the polls, the Conservatives are ahead of the main opposition Labour Party by 15-20 percentage points, with the latter’s vote share having slumped to 25%. By calling an early election the Conservatives are hoping to capitalize on the year-long spat between Labour Party leader, Jeremy Corbyn, and his parliamentary colleagues that has undermined public confidence in their party and its ability to govern. (The anti-EU UKIP and pro-EU Lib-Dems are tied in third place with roughly 10% vote shares respectively).

As the UK has a first-past-the-post electoral system [3], these polling stats would, assuming an even distribution across the 650 constituencies, translate into a huge majority for the Conservatives of approximately 112 seats – an increase of 50 seats on current levels, gains that would be mainly at the expense of Labour.

One quirk of the UK election system is that, partly in a bid to stabilize the previous Conservative-Lib-Dem coalition government, legislation was introduced – the Fixed Term Parliament Act (FTPA) – that took away the PM’s ability to set an election date unilaterally.

There are two ways in which the FTPA can be overridden. One way is for the government to “lose” a no confidence vote, which in the current circumstances would imply – as ridiculous as it sounds – the present government calling for a vote of no confidence in itself and voting in favour of the motion; not an obvious foundation from which to begin campaigning to remain in office.

The other, obviously more appealing, way is for the government to secure a two-thirds majority in parliament to proceed with a snap election. This is why Theresa May tabled a vote on June 8th  election date in parliament (it passed 522-13). Yet, in order to secure a two-thirds majority, the Labour Party had to side with the government and support the motion. Given the poll readings, this appears to be akin to political suicide – Turkeys voting for Christmas [4].

Part of the reason the Labour Party supported the government in calling a snap election, despite their dire polling, is bravado. Elections are how the composition of national parliament is changed. Foregoing the opportunity to allow voters to exercise their democratic right would be viewed as a sign of weakness. This would be especially uncomfortable for Jeremy Corbyn, a leader many of his own Labour MPs have long-considered unelectable. Avoiding an early election would only serve to fuel internal party strife –  a case of damned if he does, damned if he doesn’t.

Alternatively, and not without merit, the opposition parties could be gambling on the fact that the underlying reality may not be quite as comforting for Theresa May (and therefore not as dire for them) as the polls predict – polls which have, let us not forget, a patchy track record in predicting vote outcomes in the UK over recent years [5].

Taking a look at the latest reading of UK government anger sentiment – see exhibit below – like France there is a very strong reservoir of public discontent. Such discontent is often associated with negative economic conditions. However, the UK economy has been doing much better than many expected [6]; although some negativity in public perceptions about UK growth crept in after Article 50 was triggered. That said, it is not hard to fathom the source of this discontent –the unhappiness of the 48% who did not want the Brexit outcome May’s Conservative government has pledged to deliver.

Exhibit 1: Government Anger Sentiment – UK

Source: www.amareos.com

In many ways this was (and almost irrespective of the outcome) an inevitable consequence of holding a referendum on such an emotive and profound issue – a deep chasm opened up between those who backed leaving the EU and those who wished to stay within the EU. Despite PM May’s words to the contrary in her press conference this division shows little sign of narrowing in the country – we are far from a united nation on this topic.

As a result of such polarization, the snap general election will become, in effect, a second Brexit referendum vote [7], something many politicians and Remainers have been actively seeking.

Given the tensions within its party, as mentioned above, and the lack of a clear stance in relation to Brexit, it is difficult to see how Labour will capitalize on the June 8th general election becoming a second Brexit referendum. It should, however, be a major positive for the Lib-Dems [8] – a strongly pro EU political party [9] that was nearly wiped out in parliament in the 2015 general election as voters backlashed against the compromises made during their stint as the minority coalition partner in the Cameron government.

Indeed, the response by Lib-Dem Leader Tim Farron, to the news of the snap election makes it clear that this is how his party intends to shape the narrative around the June 8 election:

“If you want to avoid a disastrous Hard Brexit. If you want to keep Britain in the Single Market. If you want a Britain that is open, tolerant and united, this is your chance…. Only the Liberal Democrats can prevent a Conservative majority.”

So, while their solid support in the polls suggest the Conservatives will win by a landslide, the strongly negative tone of crowd sentiment towards the current government, which is largely attributable to Brexit fears, is a clear area of weakness for them – one that other political parties will seek to exploit to the maximum. [10]

If they succeed in turning the snap election into an implicit second Brexit referendum vote, it suggests the outcome may not be as favourable for the Conservative Party as they (and many others) seem to think given the opinion polls. It will do also little to heal the deep divide within Westminster that Theresa May is aiming for if there are greater numbers of pro-EU Lib-Dems sitting as MPs come June 9th as seems highly probable.

So enjoy the rally in GBP triggered by expectations of a landslide Conservative victory and a smoother Brexit path for now, but don’t expect it progress too far, especially as the crowd’s persistently bearish assessment of the currency has now been largely unwound – see exhibit below.

Exhibit 2: Crowd-sourced Sentiment – GBP

Source: www.amareos.com

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Sentiment Analytics are based on MarketPsych Indices

FOOTNOTES:

[1] Since triggering Article 50 last month the Conservative government has come in for a great deal of criticism from the other major UK political parties about its approach to the Brexit negotiations, none more so than from the strongly pro-EU SNP leader Nicola Sturgeon who used it as a platform to push for a second Scottish independence referendum – see: https://amareos.com/financialresearch/the-market-sentimentalist-ready-steady-brexit/

[2] Never underestimate a politicians’ desire to remain in power.

[3] The election date is prior to the proposed boundary changes due in 2018 which will reduce the number of seats in parliament from 650 to 600.

[4] He we are referring to Turkey the animal, not Turkey the country which instead voted narrowly in favour of sweeping constitutional reforms that boost President Erdogan’s control – see: https://amareos.com/financialresearch/market-sentimentalist-turkeys-referendum-win-lose/.

[5] Most prominently the last UK general election and Brexit.

[6] In their latest economic forecasting round the IMF increased this year’s UK real GDP growth forecast to 2% – an increase of 0.5 percentage points, the greatest increase of all the major economies – see: http://www.imf.org/en/Publications/WEO/Issues/2017/04/04/world-economic-outlook-april-2017.

[7] Surveys conducted after the election date was announced put Brexit as the top issue for voters by a huge margin.

[8] They are on a par with the SNP in terms of favouring continued British membership of the EU. Anecdotally, the LibDems announced that within an hour of the snap election being called they had

[9] Of the 9 Lib-Dem MPs, 7 voted against triggering Article 50.

[10] It will be very interesting to compare the tone of the Conservative campaign with that of the Lib-Dems. We strongly suspect that Project Fear II will be the nickname attached to the latter campaign as the Lib-Dems stoke worries over a hard Brexit to garner support.

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