UK political limbo pressures gilts, sterling

By Simon Falush and James Davey

LONDON (BestGrowthStock) – Gilts fell and sterling retreated against the dollar on Tuesday as the prospect of the Labour party holding onto power in coalition with the Liberal Democrats began to weigh on UK assets, but equity markets were resilient.

Prime Minister Gordon Brown said on Monday he would step aside to entice the Liberal Democrats into a pact with his Labour Party, and away from an alliance with the Conservatives, who won the most seats in last Thursday’s general election, but fell short of an overall majority.

The 10-year gilt yield was up 3.9 basis points at 3.96 percent, similar to levels set late on Monday, having earlier hit its highest level since April 4.

The spread versus 10-year Bunds was 102 basis points, likewise similar to levels late on Monday and down from a peak of 109 basis points set earlier on Tuesday.

Both gilts and Bunds fell heavily during the main trading session on Monday due to a reversal of safe-haven flows after the announcement of a $1 trillion EU/IMF deal to support euro zone countries in any future Greek-style fiscal crisis.

The pound was weaker against the dollar, quickly reversing a brief recovery after UK March industrial output showed the biggest surge in eight years.

“For sterling, a Conservative-Lib Dem coalition is probably the best outcome in that the coalition could have a clear majority without the need to rely on the smaller interest parties,” said Chris Turner, head of FX strategy at ING.

“The fact that a Labour-Lib Dem coalition is now a possibility has hit sterling and if talks are not resolved very soon, international investors will continue to reduce sterling exposure as political gridlock raises chances of another election this autumn.”

EQUITIES RESILIENT

UK equities however, while weaker, were trading in line with their European peers. Britain’s FTSE 100 was down 1.8 percent while the more domestically focused midcap index was down 1.6 percent, outperforming a 1.9 percent fall in the pan-European FTSEurofirst 300.

“Overall the markets are still in a better frame of mind than they were at the end of last week before the Eurozone package. That helped the UK markets buy some time,” said Howard Archer, chief economist at IHS Global Insight.

Equities surged on Monday following a $1 trillion euro zone rescue package easing concerns of EU debt defaults and further economic dislocation.

Charles Dunstone, chairman of Internet and telecoms provider TalkTalk, said he was less worried about the color of the next government and more concerned about getting one in place.

“Probably like everyone, we’d just like a government,” he said.

“The longer this (no new government) goes on the more worried the markets will be and if it ends up being a coalition not involving the Conservatives I suspect there will be some disappointment in the market and some adverse reaction,” Archer at Global Insight said.

Stock Market Research Tools

(Additional reporting by Tamawa Desai, George Matlock and Georgina Prodhan; editing by Tony Austin)

UK political limbo pressures gilts, sterling