Post-election financial panic? We’ve heard that one before

Outlook

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The Independent Online

“If the British don’t decide to put in a government with a working majority, and the markets think that we can’t tackle our debt and deficit problems, then the IMF will have to do it for us.”

That was Ken Clarke indulging in some scaremongering back in the 2010 election campaign. As we know, the British public delivered a hung parliament, despite the former Tory chancellor’s imprecations. And, lo, the sky did not fall in.

The moral? Be sceptical when you hear tales of impending financial panic during election campaigns. They’re creeping back a bit now. As polling day approaches, some City analysts are starting to talk up the prospect of financial instability after 7 May.

They point to the price of sterling volatility options over the next three months, which are at their most expensive since the last election. They note that sterling is now trading at a five-year low against the dollar. One Nomura strategist even suggests that data from the Debt Management Office indicates a UK sovereign “buyers’ strike” from non-residents who want to slash their exposure to gilts. Take this kind of noise with a large pinch of salt, though.

Explaining short-term currency market moves is usually a charlatan’s game. Yet the pound is far more likely to be trading lower against the dollar because of expectations that the US Federal Reserve could soon lift its policy rate, rather than fears that the next UK government will trash the British economy.

Gilt strike? That’s hard to square with the fact that the 10-year benchmark was yesterday yielding just 1.6 per cent, down from a peak above 3 per cent in late 2013. That’s the kind of interest rate that points to secular stagnation rather than a return of the oft-forecast bond vigilantes.

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The pound is far more likely to be trading lower against the dollar because of expectations that the US Federal Reserve could soon lift its policy rate, rather than fears that the next UK government will trash the British economy

Moreover, that level of bond market calm is hardly surprising given what we’ve seen in recent years. For all the Conservative hyping of Labour’s supposed fiscal irresponsibility, the opposition is committed to following the Coalition’s tight spending plans in the first year of the next parliament. 

And if growth comes in as the Office for Budget Responsibility expects in the coming years, that will leave only a relatively minor fiscal repair job over the next four years to get the current budget into balance by 2019-20. True, that means more borrowing and gilt issuance than under the Conservatives’ plans to balance the overall budget by the end of the parliament. But remember that balancing the current budget over a five-year horizon was the Coalition’s fiscal mandate over this parliament. Labour is merely carrying on with the Coalition’s policy. Why exactly would markets panic over that?

There is also the Bank of England to consider, which in the event of a financial panic has proved in recent years that (unlike the European Central Bank) it has the nerve and the ability to buy up sovereign bonds in large quantities, if necessary, to deliver its inflation mandate.

Of course, one cannot rule out the prospect of a market flip-out after 7 May. If we are in a world secular stagnation – as some fear – then the value of UK equities looks due for a correction; future earnings may not justify those share prices. And the country’s large current account does represent, as the Bank of England’s Financial Policy Committee recently noted, a potential source of vulnerability. The pound could, potentially, fall a long way.

Yet the main point is that there is virtually nothing in the UK’s main financial market indicators to set the alarm bells ringing at the moment. The irony is that supposedly skittish financial markets are proving rather better at coping with the political uncertainty thrown up by this poll than many politicians and pundits.

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Gatwick announced a 9.2 per cent year on year rise in traffic in the month

Are we flying blind over the environment?

Anything your airport can do mine can do better. Heathrow yesterday hailed a 3.4 per cent increase in passenger numbers on a year earlier in March. But Gatwick managed to trump that by announcing a 9.2 per cent year on year rise in traffic in the month. Both airports, naturally, seized on their respective performances to press the case for expansion ahead of the final report from Sir Howard Davies’s Airports Commission – although the latest figures don’t really change much about the big picture, which is of two airports pretty close to full capacity.

And, despite their massive lobbying efforts, most businesses don’t seem to particularly care which of the two London airports prevails in this battle. So long as politicians finally approve some additional aviation capacity for the region.

But one consideration has apparently slipped under the radar in the PR tussle: carbon emissions. If Britain is to meet its CO2 reduction targets, is it really feasible that we can expand airport capacity in this way? In its interim report, the Davies commission answers in the affirmative. But that’s based on some arguably optimistic future projections of airline fuel efficiency and increased biofuel use.

There is growing concern among some investors and regulators about a potential “carbon bubble” in energy stocks, based on the calculation that the high share prices of the oil and gas extractors cannot be reconciled with the commitments made by governments to reduce fossil fuel emissions. If those projected airline fuel efficiencies don’t materialise we could end up talking about an “aviation bubble” too.

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