FTSE to weather political storm after Tories fall short of majority

The results of Britain's General Election might have sparked political turmoil, but the markets could take the blow in their stride.

Theresa May's decision to call a snap general election in a bid to boost her mandate has spectacularly backfired, plunging the UK into uncertainty with just over a week before Brexit talks begin.

The ruling Conservatives are set to lose 17 seats, with Labour making a surprise gain of 34 MPs in the House of Commons, according to the latest predictions.

While fears a hung parliament could dent Brexit negotiations sank the pound to its lowest level in six weeks, the stock market's reaction is expected to be more subdued.

Britain's main benchmark suffered its biggest drop since the Brexit vote when Theresa May surprisingly called a snap election back in April, but analysts expected the Prime Minister to secure a majority.

However, while May has fallen short of securing a majority, the FTSE is set to open about 30 points lower as equity markets look to be adopting a risk-off approach, although the prospect of a market collapse at the open remains unlikely.

"FTSE 100 futures have been remarkably resilient, falling just over 1% overnight," said Mike Van Dulken, head of research at Accendo Markets.

"And only as far as late May lows, from which they have already rebounded as the international contingent once again embraces the weaker pound and translational benefits that offers. Similar to what we saw in the wake of last June's referendum."

UK stocks, however, were under pressure in Asia, with shares in HSBC and Standard Chartered respectively trading about 0.65% and 1% lower in Hong Kong.

"This suggests we may see a bit of a selloff in financials on the open and that could drag on the market," said Neil Wilson, senior analyst at ETX Capital.

"Other UK-exposed stocks are trading down. A hung parliament is the corridor of uncertainty that markets don't really like. There is not enough support for a Labour-led coalition but the Tories are going to find it hard to get a working majority."

The weak pound could also provide some support to Britain's stock market. Sterling fell as much as 2% against the dollar in response to a shock exit poll released at 10pm on Thursday night (8 June), which forecast the Conservative Party would fall short of winning an overall majority.

While the pound recouped some of the losses, after results began trickling in it remained almost 1.5% lower against the euro and the dollar ahead of the opening bell.

Kathleen Brooks, research director at City Index, said: "The price action in gold priced in pound also suggests that the market is not in panic mode.

"The FTSE 100 futures market is also predicting a small loss for the UK index; however, the early decline in sterling could benefit the FTSE 100 later today."

Throughout her campaign, May repeatedly stressed she needed a strong mandate to secure the best Brexit deal possible but the election appears to have significantly undermined her position.

However, some analysts warned that the political turmoil triggered by the General Election will have serious financial repercussions, particularly as it could delay the Brexit negotiations, which are due to begin in just 11 days.

"With Theresa May's job now surely on the line, just as the UK is set to begin Brexit negotiations, and a clear shift in voting dynamics across Britain, there is yet another enormous storm cloud of uncertainty about who will lead talks and how they will do so," said Nigel Green, chief executive of financial consultancy firm deVere Group.

"We're entering into a perfect storm of chaos and the uncertainty is set to unleash mayhem across global financial markets, at least in the short term, as they react to the growing question marks hanging over the British parliamentary landscape."