UK markets rebounded Friday on news of the surprise success of the Conservative Party in the U.K. elections. The Conservatives have been governing in coalition with the Liberal Democrats over the past 5 years, but will now be able to form a government alone for the first time since 1992. The markets had been expecting a messy and uncertain situation and typically welcome Conservative governments, especially one that has committed to slashing spending and not raising taxes.
There are four dramatic sideshows to the major story:
Scotland’s Pro-Independence Scottish National Party (SNP) won almost every seat in Scotland, wiping out the Labour Party in its heartland and becoming the 3rd largest party in Parliament. Although the Scots narrowly voted to remain in the U.K. in a referendum last year, it is beginning to seem as though Scottish Independence may now just be a matter of time in arriving. An independent Scotland led by the SNP with their policy of shutting down NATO’s submarine bases would endanger the UK’s leading role in NATO and seat on the UN Security Council. The financial implications of Scottish Independence would also be likely to spook both the markets and the European Union.
The centrist Liberal Democrat party’s vote collapsed and its Parliamentary representation was almost wiped out.
The United Kingdom Independence Party, which calls for immediate withdrawal from the European Union, won 13% of the vote: the 3rd largest share of any party.
A demoralized and bewildered Labour Party has lost its base in Scotland and will begin a bout of introspection and soul-searching. Should Scotland become independent, it will find it extremely difficult to win an election in the remainder of the U.K.
The FTSE was up 101 points at the opening session and sterling rose 2 percent in overnight trading. Traders say however, that the rally may be unlikely to last after the election shine fades.
The result also places the burden on PM Cameron to go ahead with his promised referendum on the U.K.'s continued membership of the European Union.
"Yes, we will deliver that in-out-referendum on Europe," Cameron confirmed in his Downing Street speech.
The uncertainty around quitting the economic and political union in a so-called Brexit could spook markets longer-term. However the fierce constitutional and economic opposition to the government from the left in the shape of the SNP is likely to present itself as the immediate source of concern.