Market relief tempered by realisation of vote on EU membership

The initial sense of relief in the markets at a clear election result has been tempered by the realisation that a vote on the UK's membership of the EU is looming.

Sterling bounced sharply on news the Conservatives were firmly on track to be the largest party in the Commons. Shares in housebuilders, estate agents and energy companies rose on investor relief that Labour's plans for a tax on houses worth more than £2m or a price freeze were off the table.

But with an in-out referendum promised by 2017, Fabrice Montagne, economist at Barclays, warned that "initial short-term cheer could be followed by a medium-term downside chill".

Bill O'Neil, head of the UK investment office at UBS wealth management, cautioned that "once people acclimatise to the certain outcome eyes will immediately turn to the challenges lying ahead. Brexit and Scoxit will now become chief concerns."

While Ukip only returned one MP, it increased its share of the vote in a number of seats. "This sends a clear anti-EU message", Mr O'Neil said. "Without the Lib Dems in place to water down opposition, a more robust approach on the EU referendum could emerge."

There was however a general sense of relief among analysts that the UK has avoided a period of messy coalition negotiations. Vicky Redwood, chief UK economist of consultancy Capital Economics, spoke for many when she said the result "removes a cloud of political uncertainty".

One of the key economic consequences is that Conservative plans both for an EU referendum and more fiscal tightening need not be watered down or modified in negotiations.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

"Something has to give. If the Bank of England hasn't hiked the bank rate by mid-2016, it might find it hard to do so for yet another year or so given that backdrop."

Attention is now set to return to the UK's economic fundamentals, including weaknesses such as the current account deficit, which hit a record high in 2014.

On Friday, the Office for National Statistics showed that the trade deficit in the first quarter of the year widened from £6bn to £7.5bn in the three months to December. In a sign of a lack of progress in rebalancing the economy, goods exports fell by £2.7bn. Imports also fell by £1.9bn.

"UK exporters are currently failing to benefit from improving eurozone domestic demand, which is likely largely a consequence of sterling's strength against the euro," said Howard Archer, chief European and UK economist at IHS Global Insight.

"The relatively disappointing export data will put pressure on the new Conservative government to provide as much support as possible to exporters."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation