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Here’s the big, potentially disruptive event that traders are ignoring

  • The U.K. snap election is slated for next Thursday.
  • Some strategists say the markets are generally not pricing in the potential for a "surprise" outcome.

The upcoming snap election in the U.K. could matter more to markets than some investors currently expect.

"I think everybody is going to be very surprised. What we have here is essentially a consensus view that Prime Minister May was going to run away with this election," Boris Schlossberg, managing director of foreign exchange management at BK Asset Management, said Thursday on CNBC's "Trading Nation."

The snap election (given such a label because it is occurring earlier than was originally intended) is slated for next Thursday, and what was initially perceived as an likely victory for the Conservative Party led by Prime Minster Theresa May over the Labour Party led by Jeremy Corbyn is being called into question as Corbyn's side gains ground.

A surprising outcome in the election may cause unrest in global equity and currency markets, particularly as the U.K. embarks on negotiating the terms of its exit from the European Union. Schlossberg said the vote could likely be more important than recent European elections.

May called the snap election because she thought she was going to expand her majority, Schlossberg said, but "now she finds herself in a very, very tough battle against an opponent who is hated by 80 percent of his own party. This is what's absolutely amazing: she's been able to bungle what seems to be a sure thing."

Indeed, the latest poll of U.K. voters shows May's lead against Corbyn has fallen to 5 points, down from 15 points. Polling firm YouGov on Friday projected May was 13 seats short of the 326 seats needed for a majority victory in Parliament. A member of May's party was charged Friday with electoral fraud and will remain a candidate in the race.

May came to power in the summer of 2016, shortly after the "Brexit" referendum in which the U.K. voted to leave the European Union. But by calling this election, she appears to have misread the voters, Schlossberg said. While he does not expect her party to lose its majority, they could well lose seats.

Schlossberg added that a blow to May will be "perceived as a loss for the pound and a loss for U.K. assets because she's going to be in a much weaker position to negotiate the Brexit with the European Commission," which is responsible for overseeing European Union legislation.

Prior European political elections have turned in largely positive outcomes as gauged by the markets; the French election, which took place in two rounds in late April and early May, was perceived a positive for the markets as newcomer Emmanuel Macron won against far-right opponent Marine Le Pen (who was in favor of leaving the European Union).

Before that, Dutch center-right Prime Minister Mark Rutte won against his opponent, the nationalist and anti-European Union candidate Geert Wilders in the Netherlands. Both outcomes were more or less seen as rejections of far-right populism.

Britain's Prime Minister Theresa May reacts as she speaks at an election campaign event at Pride Park Stadium on June 1, 2017 in Derby, United Kingdom.
Getty Images
Britain's Prime Minister Theresa May reacts as she speaks at an election campaign event at Pride Park Stadium on June 1, 2017 in Derby, United Kingdom.

In a note to clients on Friday, Bank of America Merrill Lynch foreign exchange strategists wrote that currency markets appeared "overly complacent" given recent polling data suggesting the Conservative Party could return to power, and could ultimately hurt the pound in the near term.

As a result, strategist Kamal Sharma wrote of the pound, "Market complacency on expectations for a sizeable majority was one of the motivating factors behind our view that GBP was likely to face near-term headwinds in the coming months as investors "buy the sizeable majority, sell the fact."

Still, Sharma wrote in the note (the title of which refers to May as "Theresa Maybe") that a strong showing for the Conservative Party would prove initially bullish for the pound but not for a sustained amount of time.

In the options market, investors appear to be preparing themselves a bit for a currency move, according to a Friday note from Brown Brothers Harriman. Although options activity shows that "at least some investors are buying downside protection," the global currency strategy team led by Marc Chandler wrote it remains 'surprised by the stability of the sterling.'"

From a technical standpoint, the pound and the benchmark stock index in the U.K. appear to be paying next week's British election no mind, said Piper Jaffray's chief market technician, Craig Johnson.

The pound has traded against the dollar in a sort of sideways range between about 1.2 and 1.3, Johnson pointed out. Meanwhile, the FTSE 100 index just logged five straight weeks of gains and it hovered around record-high levels in Friday trading.

"At this point in time, markets seem to be not particularly worried about this election coming up given that they remain fairly calm," Johnson said Thursday on CNBC's "Trading Nation."

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