Asian stocks fall as UK political crisis threatens markets
Posted on 11 May 2010 with no comments from readers
The huge rally in global stock markets that followed the trillion dollar euro-bailout package did not last a day in Asian markets, and a political crisis in the UK threatens to upset financial markets in Europe again today.
Yesterday UK Prime Minister Gordon Brown offered to step down in favor of a new Labour leader to facilitate a coalition between his party and the Liberal Democrats who indicated an ending of their discussions with the Conservatives.
Market response
This new coalition arrangement is far from what financial markets want to see, and the pound sterling dipped immediately overnight. And the reaction of the London stock market today is inevitably going to be negative, right after yesterday’s huge rally.
High volatility in stock markets is a classic indicator of a reversal of a trend. The violent swings in global markets over the past couple of weeks can therefore be interpreted as the writing on the wall for the long rally, with the euro-bailout stock surge as some kind of grand finale.
The political crisis in the UK is very real as no party can form a government on its own, and that makes delivering a stable government that can deliver an agreed program of public spending cuts very difficult. This puts the UK in a worse position than Greece right now.
But the UK financial markets are very much more significant to the world than anything in Athens. London is a major financial centre. The repercussions are enormous.
Pound falling
UK government bonds will fall as this political impasse continues and yields rise. Stocks will be sold down as the cost of credit is going up. And the pound will be sold in the currency markets as the political will to support the currency looks significantly weakened.
All eyes will be on the Labour and Liberal Democrat negotiations. But the die is already cast with the ejection of the Conservatives and this will throw a long shadow over financial markets today.
It looks certain then that global stock market volatility will continue and the bias to the downside means that a big fall should not be ruled out.
