Wealth managers appeared to be broadly sanguine about news that the UK premier has sought an early-June general election to give herself a wider mandate to push through reforms, and in particular, Brexit.

UK voters returned from the Easter holiday today to be told by Prime Minister Theresa May that the country will prepare for a general election on 8 June, which according to opinion polls could deliver the ruling Conservative Party a stronger majority in the House of Commons than that which it currently enjoys. Wealth managers, while admitting to be caught by surprise at May’s announcement, said May had offered some clarity that should prove broadly positive for markets.

Sterling initially slumped against the dollar as news came out that May was planning a major announcement; however, the pound surged after she called for the snap election. In early-afternoon trading, sterling traded as high as $1.268 against the greenback.

The Conservatives, elected into office in 2015 with a slender working majority, currently have a majority of 17 Members of Parliament. With the UK having just triggered the formal exit process from the European Union, May fears that without a larger share of seats, she may struggle to get some of her agenda through, including the Brexit process itself.

Delivering a statement outside her official UK residence in Downing Street, London, May said: "Our opponents believe because the government's majority is so small, that our resolve will weaken and that they can force us to change course. They are wrong. They underestimate our determination to get the job done and I am not prepared to let them endanger the security of millions of working people across the country.”

May said an election is needed now. “We have at this moment a one-off chance to get this done while the European Union agrees its negotiating position and before the detailed talks begin. I have only recently and reluctantly come to this conclusion. Since I became prime minister I have said that there should be no election until 2020, but now I have concluded that the only way to guarantee certainty and stability for the years ahead is to hold this election and seek your support for the decisions I must take,” she said.

Tomorrow, the government will move a motion in the House of Commons calling for a general election to be held on 8 June. That motion, as set out by the Fixed-Term Parliaments Act, will require a two-thirds majority of the House of Commons.

If, as polls suggest, the Conservatives do return to office, it could trigger speculation about what happens to the Labour Party, which is led by veteran leftwinger Jeremy Corbyn. He is opposed by many of his own MPs but is supported by a majority of the party membership. The Liberal Democrats, led by Tim Farron, is arguably the most pro-European Union of all the parties, which may give it some appeal in some constituencies in the more pro-Remain parts of the UK, such as the Southeast, but cause it problems in areas that voted for Brexit, such as parts of the North, Midlands and East Anglia.

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“Theresa May’s surprise announcement has caught markets on the hop today, but they are not overly concerned by the prospect of a snap election. The muted response in sterling, gilts and UK equities suggests markets are savouring the possibility of much-needed clarity around the Government’s Brexit negotiation stance,” Dean Turner, economist at UBS Wealth Management, said.

“If the general election is held, we believe it is highly likely the Conservatives will increase their majority and firm up the future direction of government policy, particularly in regard to Brexit,” Turner said. “The Prime Minister has been softening her rhetoric on Brexit in recent weeks and we expect her to use this election to secure a mandate for future direction of the talks,” he continued.

John Taylor, manager of AB Diversified Yield Plus Portfolio at AllianceBernstein, said the announcement added to an already nervous political environment because of the presidential election under way in France.

“With a significant lead in the polls it makes sense for Theresa May put a clear gap between the end of the Brexit negotiating and the general election. She will hope to increase her current slim majority in parliament, an outcome which would help her during the Brexit negotiations. Given the uncertainty in Europe and around the globe investors should consider exposure to bonds that could deliver valuable diversification. A more global approach could help European investors shelter from Europe’s political risks, while also benefiting from differing dynamics in emerging and developed markets,” Taylor said.

David Page, senior economist at AXA Investment Managers, said: “Although two recent polls suggested widely differing fortunes for the Conservatives, one suggesting a large 21-point lead over Labour (ComRes/Independent) the other a much narrower 9-point lead (Opinium/Observer), the majority of polls have tended towards the former. Moreover, May said this would be about leadership. Having committed the UK to a two-year negotiated exit timeline, she now asks who would deliver the better outcome: a `strong and stable’ PM May or a coalition led by Jeremy Corbyn? This hopes to capitalise on the huge, 37-point lead she enjoyed in a recent (Ashcroft) poll on who would make the better Prime Minister.”

“And so the Conservatives aim to crystallise an apparently strong moment, with the future threatening difficult and unpopular Brexit negotiation compromises and the potential for a rebound in the opposition.

With polls, recent local elections and by-elections so supportive of Conservatives and damning of Labour’s chances, the prospect appears to be for a significantly larger Tory majority. This would not only strengthen the Tory’s ability to pursue its own interpretation of Brexit, but also PM May’s position within the Tory party (by reducing the relative strength of Tory back-benchers currently able to leverage the government’s current thin majority). This looks the more likely outcome,” Page continued.
 
“One risk for the government remains that the election becomes a de facto second referendum, with the Lib Dems attempting to become the party of the 48 per cent (those that voted to Remain). Large Lib Dem gains, in keeping with recent local and by-election results, could see the Conservatives failing to secure an increased majority, potentially threatening the possibility of a future coalition. However, in many peoples’ eyes, this will remain a contest between PM May and Labour leader Corbyn. Nevertheless, there must be a real risk that the outcome of an 8 June election would be to make a material change to the government and hence alter the course of the proposed Brexit negotiations,” he added. 

Citigroup analysts said that “focus will be on how the currently `Remain’-leaning Parliament will change and what that may mean for the likelihood of negotiations with the EU breaking down. Our base case continues to be Hard Brexit, defined as an eventual single market exit (to control immigration) with a long transition period. The expectation of a stronger Conservative majority post-June somewhat decreases the chance of a Chaotic Brexit”.

The bank said the political calculus for moving the timetable forward is “logical”‎. 

“Initially, the May government would have hoped to campaign in 2020 having concluded a "smooth Brexit". 10 months after the UK Referendum vote, the perceived timeline and complexity of negotiations has lengthened,” it said. 

“By now, the UK government has factored in the notion of a post-2019 transition period, where membership of the Single Market but also freedom of movement and European Court of Justice supremacy would continue, thereby lengthening the timeframe for formal Brexit to 2022. Meanwhile, French presidential and legislative elections continuing through June and a new German government likely not in place until year-end, plus the absence of any "hard" deadlines in the coming months could provide a political opportunity for PM May to strengthen the size of her slim parliamentary majority (currently 330 out of 650 seats) as well as her personal mandate, having taken over the leadership from David Cameron when he resigned in July,” it said. 

Citigroup said its 5-poll average currently puts the Conservatives at 43 per cent, Labour at 25 per cent, UKIP at 11 per cent, Lib Dems 10 per cent, SNP 5 per cent and the Greens 4 per cent. 

“The majority of the Conservative Party may increase by dozens of seats, mostly at the expense of the opposition Labour Party. The pro-EU Lib Dems may recover from their 2015 debacle, while UKIP still looks in disarray and may struggle to gain seats in Parliament. Overall Parliament may look less pro-EU than previously, supporting the PM's plans for an orderly exit from the Single Market (and thus Hard Brexit),” it added.