Since April 14th, the odds of a hung parliament have risen from 40pc to 60pc. I have no reason to doubt the veracity of the FT’s survey of investors: given all they have to worry about, no doubt they would prefer to be able to drop ‘political risk’ from the list, and would prefer undivided power in the hands of either Labour or Conservatives (note: the survey does NOT find they favour Tories).
But market action since the debates has done little to suggest a hung parliament spells Panic and Doom. Yes, today the pound is down against the dollar:
Medium term gilts are also relatively untroubled:
and the expectations for interest rates in the next 18 months suggest weaker rates (you have to take this number from 100; the graph is for September 2011, interbank rates).
So what do I think is going on? The mild currency weakness alongside lower rates for the near future suggest to me that the markets think monetary conditions will be easier than they would otherwise have been. Depending on whether this is a demand- or supply-led movement, we can’t say for certain that this means X. It would be unrealistic, in my view, to suggest that the markets expect greater fiscal tightening than before (which might achieve lower future rates and lower sterling by cutting the government’s demand for borrowing, and depressing the real economy so that it too has little demand for borrowing); the workable Tory majority scenario has receded.
Could it mean more QE in the near future? Hard to say: none of the parties has said much about this, so it is difficult to map onto a political movement. Greater toleration for higher inflation in the future? Quite possibly. I would like to see the figures from the Bank on this.
But none of them are reasons to panic. That old cliche of the panic stories, the FTSE, is more affected by the lack of air activity and Goldmans than anything political, and remains massively up in the last year.
(UPDATE: Ed Conway has done it much better here)