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Snap election and geopolitical issues

14 April 2017

Will the UK election announcement get in the way of Brexit negotiations?

We believe that in the short term Brexit negotiations will not be greatly impacted by the snap election. Despite Article 50 being triggered, we are unlikely to see much progress until later this year once French and German elections have passed. In the background, civil servants will be working with their European counterparts to determine the best options for their political masters. If Theresa May gets a sizable majority, as the polls suggest, then she has a five year term ahead. Therefore, a phased Brexit, or even an extension to the two year negotiating period, may be easier to handle without the election headache in 2020. This may, however, leave her free to push through a hard Brexit; in addition it may give the Scottish Nationalists further impetus in their efforts to break up the Union. The immediate reaction to the announcement was a move up in sterling but I would not read too much into this. While Mrs May could get a stronger mandate to represent the UK in negotiations, the European Union still has a duty to do the best for the other 27 countries and nothing has changed there.

What impact have the geopolitical issues with North Korea and Syria had on markets?

Geopolitical risk has been rising for some time. Trump’s isolationist ‘America first’ attitude appears to have been changed by the use of chemical weapons in Syria. His action in Syria and using the “Mother of Bombs” in Afghanistan demonstrates how seriously he takes the US global responsibilities and their ability to take action. We appear to be seeing a revival of the US as the world’s police force. North Korea has remained an issue for some time and the recent missile and nuclear tests have raised tensions in the region in, what appears to be, a test of the new president. However, in terms of military action, with US troops on the ground in South Korea and a large population within range of North Korean artillery, the options are more limited. In practice, the Chinese are likely to have more impact than US threats. The Chinese are North Korea’s key ally and a cut in supplies of fuel from China could cripple the economy and restrict military activity.

The market impact so far has been limited. Investors seem to be taking the raised political tensions in their stride and view the actions taken so far as geographically confined. An escalation of military action in Korea is seen as unlikely. Gold, a traditional beneficiary at times of geopolitical risk, has moved up but not significantly. Credit default swaps which are a measure of the risk of a country defaulting have risen slightly for Korea but still remain at about the same level as France, so not suggesting any greatly raised risk level.


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