UK stocks celebrate election results; sterling soars

The U.K.'s FTSE 100 posted stellar gains on Friday, topping the psychologically important 7,000 mark, buoyed by the unexpected results from the country's parliamentary election.

With investors traditionally cheering a lack of uncertainty, it was no surprise that risk assets were surging with the news that the U.K. Conservative Party will now lead the country's government for the next five years.

The U.K.'s FTSE 100 closed provisionally 2.3 percent higher at 7,046.82 on Friday as the results showed the Conservative Party managed to secure a majority, gaining the 326 seats needed to govern.

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"The markets' reaction to the result has been predictably positive, with the pound being the initial beneficiary. Gilt yields have also fallen on the prospect of more austerity and a lower deficit while shares are rising, unsurprisingly led by house builders, domestic retail banks and regulated utilities and outsourcing companies. To put things into perspective, though, that still leaves the index below where it was a week last Tuesday," John Wyn-Evans, head of investment strategy at Investec Wealth & Investment said.

Divided Britain?

Leon Neal | AFP | Getty Images

This comes despite a strong result for the Scottish National Party - which has raised questions again over the country's independence from the U.K. - and the increased chance of a referendum for the U.K.'s membership in the European Union - which is touted for 2017.

Financial services and banking stocks were major outperformers. Shares of Barclays closed 3.7 percent higher, Lloyds was up 5.7 percent and RBS saw a rise of 6.1 percent.

UK housebuilders, impacted by fears of the mansion tax and less home ownership under a Labour government, have also been substantial beneficiaries. Home builders Barratt, Persimmon and Taylor Wimpey all rallied over 5 percent. Berkeley Group closed nearly 10 percent higher, as did bookmaker Ladbrokes.

The U.K.'s blue-chip index has historically been positively affected by elections, according to Kensho data.

It has risen after each election since 1987 apart from in 2010. One notable moment in history was in 1992, when the FTSE surged 3.7 percent in one day after Labour unexpectedly lost to the Conservative Party.

"Financials have seen a bounce with Lloyds Banking Group leading the way, up 6 percent. House builders and estate agents are also up strongly,especially those with a London focus, where Labour's proposed mansion tax would have had an impact on price and transaction levels. The energy utilities are also higher as the risk of price controls has gone. Some of the outsourcing stocks are stronger today, driven by the view that a Conservative government may continue to look at outsourcing to reduce costs in the public sector," said head of equity research at Killik & Co, Nicolas Ziegelasch.

Sterling jumps

Sterling jumped as much as 2 percent against the U.S. dollar, but pared gains to trade around 1.3 percent up at $1.54 at 5:30 p.m. London time.

Often thought to have the most exposure to the U.K. economy, the currency is also the most negatively affected by U.K. elections, according to data market analytics tool Kensho. The pound has edged lower during the trading session following every single election since 1987. 2010 was the exception -- which is surprising, because it took ten days for the Conservatives and the Liberal Democrats to form a government.

Ten-year benchmark U.K. gilts dipped on Friday afternoon, with yields, which move inversely to prices, at 1.87 percent by 5:20 p.m. London time.

"The fact that the election has seemingly delivered a government that could well survive for a full term – and crucially avoided the need for another general election later this year – is good for stability which should be supportive to economic activity," Archer added.

"However, while the markets are likely to be happy with the election result in the near-term...major questions remain further out that have the potential to be major causes of uncertainty and instability."