Global Macro Weekly Digest (Issue 83):UK election preview,a landslide victory is now in question as

The UK general election will be held on June 8th, 3 years ahead of schedule, as Prime Minister Theresa May seized the initiative on Brexit (on April 18th) by calling a snap election, as an official endorse for her plan to deliver a smooth British exit from the EU.

    Winning is not the purpose of the election. If May’s Conservative Party cannot significantly increase its seats (now at 330/650) in the House of Commons, the effect of winning will be much undermined; and if the seat obtained even decreases, then it will probably mean a defeat for May. Recent polls show that the gap between Conservative Party and the Labor Party (the official opposition) has narrowed from 20% in mid-April to 5% now, questioning the odds for a landslide victory. However, seat projections still forecast an increase of more than 30 seats for Conservative Party.

    As the election was “created” for Brexit negotiations, parties’ manifestos on Brexit policies are the key focuses. May still holds hard stance on Brexit, clarifying that Brexit means out of the EU single market, out of the customs union and seeking to strike free trade deals around the world. She insists on immigration control, “parallel” negotiations on trade deals and “divorce deal”, and maintaining the “no-deal exit” as an option against the EU.

    Compared to May’s hard stance, Jeremy Corbyn, the leader of Labor Party, holds a much mild view on Brexit. He rules out “no deal” as a “viable option”, promises “fair immigration rules” instead of controls, and intends to retain benefits of single market and customs union as a “partner” to EU. The Labors’ manifesto sounds like a more pleasant note for Brexit negotiations, but neglects many voters’ concerns on immigration. Also, ruling out the “exit with no deal” option could make UK end up with a bad deal, as EU negotiators would know that the UK Prime Minister has no option but to accept whatever they put on the table. Elsewhere, the Labors’ manifesto on increasing taxes and borrowings to expand the social welfare system and nationalize the utilities sector just does not add up. So, in our view, even May’s U-turn on social care led to the rise of her opponent, the Conservative Party’s policies still appeal to more voters.

    Looking forward, the Brexit negotiations are expected to be complicated anyway. May’s landslide victory (if succeeded) could only reduce the frictions from inside, but UK-EU disputes are still unlikely to be avoided. On April 29th, EU27 leaders agreed on the draft guidelines at the Brexit summit. As expected, the draft showed hard stance, stating that the EU will delay trade talks until UK agrees principles on an exit bill of around EUR 60 billion (paid by UK) and the rights of EU migrants. Against such backdrop, the deadlock risk for the initial “divorce talks” expected in 4Q is notable.

    In sum, we expect the Conservative Party to win the snap election, and a landslide victory is needed for May to reduce frictions from inside. Regarding market reaction, the pound already dropped as the polls narrowed; thus, we expect a moderate rebound if the Conservative Party could win a much-increased majority, and a further fall otherwise.