UK Election - Traders Guide

Unless you've been living under a rock, you'll know it's the UK election tomorrow. An interesting election at that which is going to have some huge ramifications depending on who wins. Now, when I say 'huge ramifications' - I mean for the markets. I'm not making any assumptions that any party will follow through on any promises.

As the election day starts on 12th December, there will be a UK-wide news-blackout on reporting results or speculation of results. There was one election where a certain UK morning newspaper reported "xxxx landslide" on the election morning and was severely reprimanded. So expect the actual election day to be quiet. Around 10 pm UK time, we'll start to see results of exit polls (where people are asked who they voted for on the way out of the polling station) and we'll start seeing estimates which will become more clear through the night. That's 5 pm US time which means the US traders are done for the day and Asia is just waking up.

By the London open, the results should be fairly clear. It's probably unlikely that there will be an outright winner and as traders, we don't want there to be. For sure, we'll have a great day or two as traders if there is an outright result. We've already seen how Brexit news has been spiking the market for years, even though the likelihood of that news being 'final' has been minuscule. This is a Brexit focused election, we can expect an initial reaction, my guess is that if Conservatives win, UK markets will rally and if labor wins, UK markets will drop. I'd expect similar on the US side as Brexit is theoretically good for US trade with the UK.

I think there is a larger chance of no outright majority, which is when all the chest-beating and posturing really starts as a coalition is built. We'll be looking out for 2 main drivers of the markets

1. The UK and European politicians speaking on the news or giving out press releases on coalition events. European leaders will likely be trying to make certain coalitions look bad for example. So we have a high risk of a news event pretty much any time
2. We'll see organized press briefings, announced in advance where parties release information on negotiations or anything else they want to go public with - like central bankers giving their opinions on certain coalitions or outcomes, or 2 parties announcing coalition talk progress.

So our plan for trading the election is all going to be that the 12th itself will be a low expectation as there shouldn't be much news about it. There could, of course, be other news driving the markets that day. For an outright win, we'll expect markets to adjust for a couple of days and for spikes as policies are announced by the new government. With no outright winner, we need to be hyper-vigilant both to unplanned news/comments (Angela Merkel is good at these) as well as press briefings from UK/EU as the coalition is being hammered out.

Expect every piece of news to be traded by the market as if it's the final word, despite the fact that this is quite far removed from reality. This is the markets, let's not expect them to actually make sense. If you aren't used to trading volatile markets, there's also nothing wrong with taking a few days off or stepping down to naturally less volatile markets -  like from indices to interest rates.

Good luck over the coming weeks & let's hope we get decent volatility throughout December and avoid the usual tedious slowdown!