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The pound jumps as Boris Johnson gets big win in UK election

Posted at 4:55 AM, Dec 13, 2019
and last updated 2019-12-13 04:55:40-05

UK stocks and the pound shot higher after British Prime Minister Boris Johnson secured an election victory that clears the way for Britain to quickly leave the European Union.

The benchmark FTSE 100 gained 1.5% in early trade in London as investors reacted to the thumping election win. The FTSE 250 index of midsize British companies added more than 4%.

The pound strengthened nearly 2% to $1.34 at 4:05 a.m. ET, its highest level since May 2018. It also rose 1.3% against the euro.

The currency had been rising steadily in recent weeks as traders bet on a Johnson win. With a solid majority in parliament, the Conservative leader can take the country out of the European Union by January 31 — removing some of the Brexit uncertainty that has hung over businesses and the economy for more than three years.

The election also ends Labour Party leader Jeremy Corbyn’s hopes of transforming the UK economy through a spree of left-wing policies that scared the business community. His platform called for the nationalization of major utilities, tax rises for companies and higher earners, and awarding 10% of companies’ shares to their workers. Corbyn said as the results came in that he would stand aside as Labour leader before the next election.

Shares in companies that had been in Labour’s firing line posted big gains.

BT Group, which faced the potential nationalization of its telecoms infrastructure arm, added 7%. Shares in another nationalization target, National Grid, added 6%. UK bank and property stocks joined the rally.

Johnson’s Conservatives have won at least 326 seats — enough to guarantee a majority. Exit polls predicted that he would win 368 of 650 seats in parliament.

Investors believe a big majority would give Johnson more time to negotiate a new relationship with the European Union following Brexit. He had promised to rush through a trade deal by the end of 2020, when transitional Brexit arrangements expire, but could seek an extension of talks to avoid the abrupt imposition of major barriers between Britain and its largest export market.

“He will be free to ignore the views of the more extreme elements of the party,” said Adam Cole, head of foreign exchange strategy at RBC Capital Markets. “An extension of the transition beyond the end of 2020 becomes that much more likely.”

Kallum Pickering, senior economist at Berenberg, said a clear victory for Johnson should mean a boost for the UK economy, which had ground to a halt in recent months. GDP growth could rise to 1.8% in 2020 from 1.3% this year, before accelerating further to 2.1% in 2021, he said.

Additionally, the Conservatives plan to end the painful belt tightening they implemented following the global financial crisis and start spending on investment projects. The party has pledged to increase day-to-day spending on public services by £3 billion ($4 billion) above current plans by fiscal year 2023, and boost outlays for longer term projects by £8 billion ($10.5 billion), according to the nonpartisan Institute for Fiscal Studies.

Damage has been done

However, some analysts struck a note of caution about whether the pound could hold on to its gains. They pointed to continued uncertainty about the future relationship with the European Union, and the dampening effect on growth already caused by the Brexit vote back in 2016.

“The level of the exchange rate now virtually disregards the damage which Brexit has so far caused to the economy, let alone the possibility of any incremental damage from the delivery of a Brexit with still uncertain prospects for a future trade deal,” said Paul Meggyesi, head of global foreign exchange strategy at JP Morgan.

“It seems to us that the market is in danger of conflating the removal of political uncertainty with the reversal of the economic impact of Brexit,” he wrote in a note to clients.