What if Labour get in? They have promised and threatened the whole of the business sector with draconian measures including the Tobin tax, says Meir Velenski
Wow, the polls are showing that Labour has eroded the large lead that the Conservative party had when they called the election.
At the start of the UK 2017 election Campaign Theresa May had over a 100 seat suggested lead. This has now dropped to less then 20 seats with Jeremy Corbyn creeping up.
How will all this affect the pound and the economy?
Markets like stability and clear direction. When you have these ingredients then companies and investors can make a ckear long term decision. So when UK companies and overseas companies look at an economy to invest in , they look at political stability as ona of their asessemnets.
Lets assume that the Tories ( Conservative Party) stay in power and stay in with a large lead. The markets will have a relief bounce and the UK pound sterling will recover somewhat as a sign of relief. In fact you well see further investment in the UK.
FX – GBP
The FX markets and the Stock markets will buy into UK companies and all GBP denominated trades will rise as a result. This rally will probably continue for between 6-8 weeks and you will see the FTSE and all other indices UK based rise.
As regards the GBP FX trade, there will be significant buying of the Pound which will be the result of the feel good factor. In addition the UK will be a place to invest and thus cause the pound will be in demand further.
How will this be reflective in trade as far as the A book and B Book operators. Well, they will see their volumes increase dramatically on all GBP FX trades and may even be the wrong side of the trade but unlikely . The trader or institution needs to ensure that they are hedged or reduce exposure .
However – what if?
What if Labour get in. They have promised and threatened the whole of the business sector with draconian measures including the Tobin tax.
The Tobin Tax is a means of taxing spot currency conversions that was originally suggested by the late American economist James Tobin. The Tobin tax was developed with the intention of penalizing short-term currency speculation, and to place a tax on all spot conversions of currency.
Can you imagine the run on the pound and the effect on the UK economy ? The prime brokers starting at the top would be under huge pressure exposed to significant FX positions that they could not get out of or simply not hedge as all other counter parties would refuse to take the trade.
GBP FX would be sold globally this causing further strain on the economy . In addition you will get the rating agencies such as Moody’s , S&P downgrading the U.K. This would mean UK government borrowing becomes more expensive .
The FTSE would drop by about 5 % and make Brexit look like a tea party . The additional measures that Labour want to take with the re nationalisation of the Train Network, electricity , gas and other privatised industries will be disastrous .
Companies will withdraw their investments and investment will be further cutback once city firms look to relocate .
With FCA Tuesday , Brexit and a labour Hard left wing government this would cause a further run on the pound , sending inflation sky high.
The B book operators and the LPs would be under pressure as positions would be exposed and in addition institutions would take a back seat to see what would happen.
Volumes on FX institutional and B book would be high post Labour victory but the UK FX market would shrink . The Tobin Tax is draconian and would simply mean the end of the city as a major financial centre .
Prime brokers may well pack up shop in the U.K. And look to relocate to more stable and friendly justifications . This would mean that all the smaller LP and trading operations will not have a local geographical LP or Prime broker in london.
By lack of physical presence this is the first stage in business going elsewhere .
Watch this space!