Markets fail to buy into hung parliament “nightmare” (Apr 10)

Much has been made of the implications for the markets of a hung parliament outcome after the general election on May 6th. But we doubt that the absence of a decisive victory for any of the main parties will result in the “nightmare” scenario for the markets that some have suggested. For a start, all the major parties seem convinced of the need to tighten fiscal policy swiftly after the election. And given that none of the parties have laid out a comprehensive set of measures to cut borrowing to a more sustainable level, a hung parliament will hardly lead to greater uncertainty about how the required fiscal squeeze will be achieved. Moreover, the markets have shown recent signs of taking a hung parliament in their stride. Gilt yields have held steady recently, despite some polls suggesting that a hung parliament is likely. Markets have also lowered their interest rate expectations over the past month, suggesting that they have failed to buy into concerns that a slower fiscal tightening under a hung parliament would lead to quicker rate hikes than would have otherwise been the case.