Markets search for direction as election results in hung parliament

The Conservatives failed to reach the key number of seats to achieve a majority, predicted to hold 318 seats, down from 330 before the election and 8 short of an outright majority.

With only a handful of results to be returned, the Tories had won 311, with Labour winning 258, the SNP 34 and the Liberal Democrats 12.

Making a vote-by-vote pact with Northern Ireland's 10-seat DUP would still see the Conservatives just edge above the key 326 line in the House of Commons.

When Theresa May called the snap election in April the Tories held a majority of 17 seats.

Market analyst Mike van Dulken at Accendo Markets said May's decision appeared to be "one of the most impressive political backfires in UK history....after Brexit, of course".

However, sterling, a key indicator of the market's confidence in the UK political and economic direction, was holding onto initial losses at 1.2765 against the dollar and the FTSE 100 was on course for a 20-point gain.

"A hung parliament was the most extreme scenario forecast; a Labour win was never on the cards," van Dulken said. "Once again, however, markets have been surprised by how voters cast their ballot. But the market reaction thus far has been remarkably sanguine. Panic it is not. Although uncertainty is once again rife."

Neil Wilson at ETX Capital, clearly a cricket fan, said a hung parliament "is the corridor of uncertainty that markets don’t really like".

He noted that there was not enough support for a Labour-led coalition but that the Tories were "going to find it hard to get a working majority".

With GBP/USD pretty static around $1.276 it was now back to where it was when May called the election.

"If the resigns we could see an initial kneejerk lower as it could throw open the leadership to a Brexiter like Boris Johnson," Wilson added. "A technically hung parliament does mean uncertainty but for sterling there is the compelling trade-off with a softer version of Brexit more likely now as Mrs May’s mandate to push through her clean, hard Brexit has evaporated.

"Voters didn’t want to hand her the blank cheque for Brexit. It may leave negotiations in limbo but would also tend to suggest that the downside for sterling is limited. A weakened Tory majority also presents limited upside in the near-term while also this shakes out.”

Analyst Chris Beauchamp at IG said it was more of fascinating night for the political ramifications than for the reaction on markets - so far at least.

"Clearly, the fact that the Conservatives will be able to get past the 326 line with the help of Northern Ireland’s DUP is probably allowing markets, at least at this early stage, to keep a sense of perspective.

"Had the result been closer, investors would have been more nervous, but it still looks unlikely that Jeremy Corbyn will get anywhere near No. 10."

The big question is how this will affect the beginning of Brexit talks, Beauchamp said. "The Conservative Party is notoriously intolerant of leaders that disappoint, but the UK needs a united front for negotiations, and now is not the time for a Tory civil war.

"Boris Johnson’s chances of PM have risen again, but perhaps now the party will let their anger simmer, but give Theresa May the chance to get on with the job. All told, it has been a compelling few hours, proving that the political turmoil unleashed by Brexit has yet to subside."