Days of market turbulence to come, analysts warn

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Uncertainty about the final outcome of the election may further unnerve the bond and stock markets, analysts said last night, following several days of turbulence amid mounting concerns that Greece may default on its debts, despite having agreed a bail-out from the International Monetary Fund.

Currency markets were first to react to exit polls suggesting a hung parliament, with the pound falling by more than a cent against the dollar, to a year-low of $1.4736. "Sterling has dived after a rocky day on the markets due to the belief that we will see a hung parliament in the morning," said Jeremy Cook, a currency dealer, in the immediate aftermath of the exit poll.

While the pound clawed back some of those losses, Gary Jenkins, head of fixed income research at the stockbroker Evolution, warned further volatility was likely: "A hung parliament with no party having a strong mandate is not good news for the markets."

Liffe, the derivatives market, opened at 1am last night in order to give institutional investors an opportunity to bet on movements in the price of gilts, the bonds issued by the UK government to fund its borrowing requirements.

there is practice and they are not always quite the same thing." He added: "In 1974 it was clear the Conservatives had lost and therefore they were out of office."

Privately, the Tories are worried that Mr Brown might try to hang on.

They say they were not consulted about the later than usual Queen's Speech, claiming it would be "anticonstitutional".

There had been some speculation in the City that an uncertain election result would prompt a sell-off of gilts, with investors taking the view that a hung parliament might make it more difficult for the next administration to get to grips with the deficit.

In fact, even before last night's results, investors had become more relaxed about the prospect of no single party winning an outright majority, with Labour, the Conservatives and the Liberal Democrats all having made it clear during the campaign that deficit reduction is a crucial priority.

Liffe's decision to open seven hours early was taken so that traders would not be suddenly confronted with volatility this morning. However, investors were relatively calm despite the confusing picture of the results.

The yield on 10-year gilts - the effective rate of interest investors charge the government to lend to it - was around 3.8 per cent last night and is expected to fall very slightly this morning.

However, traders were not expecting any dramatic moves.

Francis Diamond, a strategist at JP Morgan, said that following John Major's surprise election victory in 1992, gilt yields fell by 80 basis points, or 0.8 per cent. "[This time, even if there had been] a landslide Conservative victory, the most you would have is a 10-15 basis point rally," he said.

While the gilt and currency markets are most sensitive to the election result, investors in shares will be concerned the results may also further hinder the stock market this morning, after days of damaging falls around the world as a result of the sovereign debt crisis in the European Union.

The remarkable volatility seen on the US market last night, with the Dow Jones falling by more than 3 per cent, having been down 9 per cent at one stage, will weigh particularly heavily over investors this morning.