Election result raises doubts over future of Brexit and May, UK stock futures untroubled

UK shares are likely to fall but not to crash heavily despite general election results pointing to an unexpected hung parliament on Friday morning and changing the picture on Brexit negotiations, with FTSE 100 futures pointing to a small 13- or 14-point fall at 0430 BST.

After savage losses initially when the exit poll unexpectedly pointed to a hung parliament, the pound has stabilised at $1.2746.

"The plunge in the pound and the prospect that the Conservatives could struggle to form a majority government is likely to have significant consequences for the start of the “Brexit” talks which are due to start in a few days’ time, as well as raise serious questions as to how long Theresa May can survive as party leader, let alone Prime Minister," said analyst Michel Hewson at CMC Markets.

On the whole, European stock futures are trading lower but the small dip in FTSE 100 futures shows that traders are not reacting too harshly towards the unexpected outcome of the UK general election, said analyst Naeem Aslam at Think Markets.

Theresa May has suffered the worst night of her political career, Aslam said, and for him the question was if and when she will resign from her position.

"The entire night was pretty much about Jeremy Corbyn, who has done a remarkable job in a very short time, a clear message to those who said he can't do this," Aslam said.

"If we can takeaway anything from all this, it is this that Brexit is surely in trouble now and nothing is off the table which includes revoking or calling for another referendum."

Aslam predicted UK equities are going to be under more pressure but the spill-over effect to global markets is going to be somewhat limited.

"So British assets are likely to face more pain and the Eurozone area may remain resilient to this shock as they have already thrown the populism out of their territory," he added, expecting global markets to look at matters which are beyond the UK vote.

The British pound had a rough night and we have experienced many whipsaws due to the uncertainty which we are facing now. We experienced the biggest single day jump in one month implied for sterling-dollar pair since October 2015. A hung parliament is only going to add more fuel to this volatility. In terms of level, I think that it is likely that we may revisit the levels of 1.22-1.23.

How the Tories could govern in a hung parliament

As the current incumbents and the largest party the Conservatives would have the first attempt at forming a minority government, said CMC's Hewson, but if they are unable to do so, then the task would then fall to the Labour Party to try and do the same with the SNP, Liberal Democrats and possibly the Greens.

"It is unlikely that there would be any coalition, given what happened to the Liberal Democrats in 2015, and as such the other parties would offer support probably in the form of a confidence and supply agreement," he said.

Looking to history, such as Jim Callaghan’s Labour party's Lib-Lab pact in the 1970s, he suggested the Tories could stay in power thanks to a confidence and supply agreement, only this time with the SNP and Liberal Democrats holding the cards.

"What this means for Brexit talks is difficult to say, given the clock is already ticking, but given that the SNP and Lib Dems want to stay in the single market the odds are rising that Brexit may well not happen," Hewson said.

"Labour has said it wants to stay in the single market while ending freedom of movement, a position that the EU are unlikely to accept. Not surprisingly given this unexpected outcome the pound has plunged, briefly dropping below 1.2700, and while some have argued that a softer Brexit might ameliorate the downside, there is still the prospect of the contents of the Labour party manifesto, that markets have to consider.

"If Labour do manage to form a minority government there is the question of how much of it will they be able to implement, in the form of their nationalisation program, as well as their plans for raising taxes, implementing a financial transaction tax, and increasing regulation on the financial sector."

Hewson said the pound could come under further pressure later, while the FTSE 100 and FTSE 250 are also likely to fall when European markets open later as investors weigh up the consequences of a possible Labour minority government, and its manifesto pledges.