The great election gamble

Theresa May’s great gamble looks to be going awry as polls have tightened with Labour pulling almost even from a staggering Tory majority at the time of announcement. Although the reliability of publicly available polls is usually low given underlying assumptions (see here for FT Alphaville’s great exposition), the momentum towards Labour is still breathtaking. Corbyn may be forgiven for having the air of Lenin in 1917.

The election was May’s to lose given the shambolic opposition. However, the general anger against the establishment seems to have turned against her. Corbyn, simply by mouthing platitudes promising socialist utopia, has become an effective channel for this anger. Moreover, the toxic legacy of Cameron and Osborne’s austerity is now being hung like an albatross around May’s neck as police and public service cuts have become an issue in the aftermath of terror events. Whether she falls is going to be mainly decided by Scotland and the youth vote. If the anti-Tory vote tactically swings en-masse towards Labour from SNP, Corbyn has a chance. Together with the millennial / under 35 vote, which has shown itself to be more susceptible to Corbyn’s snake oil, it may push him into Number 10 on the the 9th (the massive voter registration amongst the 18-24 year olds does point to a Corbyn surge).  

For a trader, given all the uncertainty, shorting Gilts seems to offer good risk-reward. If Corbyn wins, Gilts are likely to sink as investors re-rate the risk premium for a potential Venezuela-of-the-West. A May win is not going to make Gilts rally much especially given current low 10-year yield of 1%. In fact, yields seem to have already outperformed recently compared to USTs (chart below). Moreover, given the impending nastiness which will be unleashed as Brexit negotiations get underway, the hit to government finances from the slowing economy and continuing inflationary pressures due to Sterling weakness, Gilt yields are likely to rise in the short to medium term from historic lows. Strong and stable, Gilts are not. 

(Disclaimer - This is merely my opinion and NOT investing advice. You should do your own analysis before putting on any position)

 Source: St. Louis Fed, FRED database, Bank of England, Author's calculations