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UK election: Watch for these market reactions
With just two weeks to go until U.K. general elections , investors are busy positioning themselves to take advantage of any major moves in asset markets.
Recent polls indicate that the result looks too close to call. Both the Labour and Conservative parties unlikely to get enough votes to govern alone, meaning another coalition is most likely on the cards.
But all coalitions are not created equal - at least when it comes to financial markets.
A socialist pact between Labour and the Scottish Nationalists (SNP) is seen as a negative for financial assets, analysts told CNBC, for instance. Whereas the continuation of the current Conservative-Liberal Democrat coalition could reassure investors and spark a rally.
But with so many potential permutations for the parliamentary elections on May 7, markets are having a hard time pricing in all the risks . Here, CNBC highlights what has happened in the past -- and what could happen over the course of the next few weeks.
Often thought to have the most exposure to the U.K. economy, sterling (Exchange: GBP=) has already slipped 3.5 percent this year against a resurgentU.S. dollar (Exchange: .DXY). The currency is also the most negatively affected by U.K. elections, according to data market analytics tool Kensho, when compared to U.K. gilts and the FTSE 100 (FTSE International: .FTSE).
The pound has edged lower during the trading session following every single election since 1987. 2010 was the exception -- which is surprising, because it took ten days for the Conservatives and the Liberal Democrats to form a government.
Valentin Marinov, a director of FX strategy at Citi, told CNBC Thursday that sterling was likely to outperform after the elections, particularly against the euro. A continuation of the current coalition was positive for the pound, he said, and a Labour-SNP alliance wasn't necessarily bad either, as it would diminish the possibility of the U.K. exiting the European Union.
Conservative Party leader and current Prime Minister David Cameron has promised a referendum on leaving the EU if his party wins the election -- something that Labour has ruled out.
"Net-net the outlook for the pound could be quite constructive longer term," Marinov said.
The U.K.'s blue-chip index is back above 7,000 points and has climbed 6.9 percent year-to-date alongside a serious rally for euro zone bourses.
Traditionally it is the most positively affected by elections, according to Kensho data. It has risen after each election since 1987 apart from in 2010. One notable moment in history was in 1992, when the FTSE surged 3.7 percent in one day after Labour unexpectedly lost to the Conservative Party.
Jonathan Bell, chief investment officer at Stanhope Capital, told CNBC Thursday that a Labour-SNP pact would create the most uncertainty for the benchmark. He warned of a selloff in that situation, with banks, utilities and retailers hit on expectations that the left-leaning parties could introduce to new, anti-business legislation.
Nomura's widely-watched strategist, Bob Janjuah, told CNBC Thursday that he thinks market participants are slowly waking up to the fact that U.K. government bond markets could become a risk asset alongside sterling.
The 10-year U.K. sovereign has watched on, as aggressive monetary policy in the euro zone pushed the yields of its European counterparts to record lows.
However, the 10-year yield on gilts spiked this week, with analysts suspecting that investors are now contemplating the future spending plans of any future U.K. government.
Historically, U.K. sovereigns have had a mixed reaction to elections, but saw a price surge after the surprise 1992 result, according to Kensho data.
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