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Hung Parliament fuels political uncertainties

June 2017

Prime Minister Theresa May’s intention to increase her Parliamentary majority through a snap General Election ended in a hung Parliament. As a result, the UK Government found itself at something of a disadvantage as Brexit talks began between the UK and the EU.

  • UK equity indices fell during June
  • The Conservative Party formed an alliance with the Democratic Unionist Party
  • Rising inflation and moribund wage growth are squeezing UK consumers

UK equity markets fell during June as investors swallowed an indigestible mix of political, corporate and macroeconomic news. Over the month as a whole, the blue-chip FTSE 100 Index fell by 2.8% while the FTSE 250 Index dropped by 3.2%. Several UK retailers issued profit warnings during June, including gaming retailer Game Digital , DFS Furniture , and online electrical retailer AO World . AO World also lost its place in the FTSE 250 Index during FTSE Russell’s quarterly reshuffle of its indices.

“UK equity markets fell during June as investors swallowed an indigestible mix of political, corporate and macroeconomic news”

Prime Minister Theresa May’s intention to increase her Parliamentary majority through a snap General Election ended in disarray during June. The vote resulted in a hung Parliament that obliged her to seek support from the Democratic Unionist Party. Having been weakened by the result, the Government found itself at something of a disadvantage as Brexit talks began between the UK and the EU. Chancellor of the Exchequer Philip Hammond urged both parties to reach “mutually beneficial transitional arrangements” in order to avoid “dangerous cliff edges”. A two-year Parliament was announced in order to accommodate the complex Brexit legislation, and there will be no Queen’s Speech until 2019.

The Bank of England (BoE) announced an increase to the capital buffers that UK banks are required to have in place from zero to 0.5% of risk-weighted assets, followed by another increase to 1% by the end of 2017. The decision – amounting to an additional £11.4 billion of capital – is intended to increase the banks’ resilience to financial shocks. The BoE’s Financial Policy Committee (FPC) cited the rapid rise in consumer credit and “benign” mortgage lending conditions as key reasons for the decision. Elsewhere in the UK financial sector, criminal charges were brought against Barclays and four of its former senior executives concerning alleged activities undertaken during the financial crisis.

The Confederation of British Industry (CBI) warned that UK economic growth is likely to “shift down a gear” over the next couple of years, curbed by Brexit negotiations and a slowdown in consumption caused by rising inflation and “stubbornly low” growth in wages. The British Retail Consortium (BRC) reported a decline in sales during May as households felt the pinch from higher prices and low wage growth. The consumer prices index rose at an annualised rate of 2.9% in May, whereas average weekly earnings fell by 0.6% year on year.


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