Market Economics | Interest Rate Strategy - BNP PARIBAS ...

measures are not promptly taken to tackle the huge
budget deficit.
The problem is that, as has been pointed out by the
IFS, the three main parties do not differ much in
terms of the size and the timing of the tightening they
plan to implement: the size is roughly GBP 71bn (or
4.8% of national income) by 2017 while, when it
comes to timing, the Conservatives plan to borrow
some 6% less than Labour and Liberal Democrats by
completing the job a year earlier. At the same time,
and crucially, no party has clearly identified the cuts
they would deliver to allow the above target to be
achieved. This cannot be overlooked. Markets are
efficient in the medium term and will wake up to the
facts described above.
At the time this note goes to press, polling stations
are still open. The simple strategy we suggest is to
ride the market in the aftermath of the election
results. In particular, there should be scope for a rally
in the sessions immediately following the election in
the event of the Conservatives gaining an absolute
majority as such result is not priced in: as discussed
above, the current rally is not simply being generated
by a bout of risk aversion. However, for the medium
term, we retain our bearish outlook for the time being
and would expect the current richness of Gilts to fade
as the concerns regarding the eurozone periphery
become second-order drivers of the sterling market,
after the domestic challenge of restoring fiscal
sustainability.
Matteo Regesta 7 May 2010
Market Mover, Non-Objective Research Section
47
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