By about 9am last Friday my capacity for surprise had been almost exhausted by the Labour Party’s stunning performance in the General Election. Still, I was a bit puzzled by the phlegmatic reaction of financial markets to the news of a hung parliament.
There was no panicky sell off as we saw last year following the Brexit vote. The fall in the pound was a fraction of that seen last June. The FTSE100 equity index was down over 3% on the Brexit news a year ago; last Friday it rose 1%.The more domestically focused FTSE250 index also ended up slightly last Friday. Journalists, pollsters and economists may have been shell-shocked by the result but financial markets took it in their stride.
The main explanation for this stoic reaction was that markets are now betting on a softer Brexit.
You can see why. The result failed to deliver the mandate Mrs May sought when she called the election. An increase in the number of Lib Dem and Labour MPs in the House of Commons may strengthen the Parliamentary forces opposed to a ‘hard Brexit’.
In a number of constituencies there seemed to have been a backlash by Remain voters against the incumbent MP.
There’s been lots of talk too from the media and some within the Conservative Party about the case for a rethink of Brexit.
The conclusion financial markets seem to be drawing from all of this is that the odds on the UK exiting the Single Market have been reduced by the election.
That may be the case. But there are also reasons for thinking that the election may not change that much on Brexit.
Mrs May pitched the election as being about Brexit, but Labour broke through with an anti-austerity message. My sense is that the outcome of the election had more to do with austerity-fatigue than Brexit.
As my colleague, Sally Jones, has pointed out, on the substance of Brexit Labour and Conservatives are not miles apart. Both want an end to free movement of EU nationals which would make it impossible for the UK to remain in the Single Market. The Labour and Conservative leadership supported the triggering of Article 50 and an overwhelming majority of MPs in both parties duly voted in favour of doing so.
Last week getting on for 85% of voters backed parties – Conservative, Labour and UKIP - which are committed to leaving the EU and ending free movement of people. The only UK-wide party with a strong, pro-EU message, the Lib Dems, saw its vote share fall from the lows seen in 2015 (though the Lib Dems did win four more Parliamentary seats).
In the last three weeks of the campaign Labour did well picking up former UKIP voters partly because it had neutralised Brexit by voting for Article 50 and promising to end free movement of people.
The Democratic Unionist Party, on whose votes Mrs May depends for a Parliamentary majority, want, like the Conservatives, to leave the EU, end the jurisdiction of the European Court of Justice and strike a free trade agreement with the EU.
So on balance my hunch is that the course of Brexit will not be significantly changed by the results of the election. But then I expected the Conservatives to win a Parliamentary majority last week.