British stocks, pound see red
London - Britain's main stock index and the pound fell on Friday as investors
reacted grumpily to an inconclusive result in national elections against a
backdrop of global market turbulence.
In the first minute of trading, the FTSE 100 share index was down 1.3%
at 5,193. That followed a drop of 1.5% on Thursday, when world markets
were gripped by a fear that Greece's debt crisis could derail the global
The British pound traded as low as $1.4449 by late morning, down from $1.51
less than 24 hours earlier.
Beyond the global turmoil created by the debt crisis, the incomplete election
returns worried investors _ with no party claiming a majority, it was unclear
what the next government's approach would be to slashing a ballooning debt while
nurturing a so-far feeble recovery from recession.
The potential lack of a strong government "does not bode well for
implementing the harsh cuts that need to be implemented to cut the budget
deficit," said Marc Ostwald at Monument Securities in London.
The opposition Conservative Party claimed the largest number of seats, though
short of a majority. Possible options include a minority government led by the
Conservatives, coalitions involving the Conservatives or possibly a multiparty
coalition excluding them.
"The worst thing for markets would be a coalition government failing in a few
months and a new election being called," said James Knightley at ING Bank. "This
would intensify the pressure on ratings agencies to downgrade the UK's
sovereign rating from AAA and make fiscal consolidation even more difficult."
"The emergence of a minority government would leave some residual uncertainty
about the outlook for economic policy as the passage of any necessary
legislation may be more difficult to navigate than if the government had an
outright majority. As such, this outcome seems likely to lead to some volatility
in asset prices unless and until the ability of the new government to operate
effectively is established," said Simon Hayes at Barclays Capital.
He added that if a Conservative or Conservative-led administration were to
emerge, bond prices, equity prices and the pound could all rise.
Douglas McWilliams, chief executive of the Center for Economics and Business
Research, said the pound's slump threatened an end to Britain's long period of
record low interest rates. The Bank of England's base rate has held at 0.5% since March 2009.
The Bank's rate-setting Monetary Policy Committee began its monthly meeting
on Friday, and will announce its latest decision on Monday. Inflation is
currently at 3.4%, well above the Bank's target of 2%.
"The pound has fallen by five cents in the past three days," McWilliams said.
"If the slide continues, the MPC will almost certainly have to raise base rates
to hit their inflation target."