Just a wobble; or something more? The general election is starting to look like it could spark some serious volatility as we head into June. For the first time a Tory landslide is not a given and there is reason to think that this alone could introduce a new bought of risk-off sentiment.

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Labour is closing the gap on the Conservative Party and the direction of travel points to the potential for significant volatility and renewed political risk in the coming weeks. Four polls over the weekend gave Labour between 33 and 35 points, nearly halving the party's deficit with the Conservatives.

Baked into sterling’s rise above $1.30 and the record highs in the FTSE is the belief that the election will produce a thumping majority for Theresa May and the resultant political certainty that markets expect from a stronger Brexit negotiating position, less pressure from Tory Brexit hard-liners, and no election until 2022. But might this assumption be wrong?

Labour has clearly notched a win in the manifesto stakes, while May has scored an own goal with the so-called ‘dementia tax’. A U-turn of sorts has already been announced but it does appear some lasting damage has been to the ‘grey vote’.  

Polls still point to a Conservative majority but a repeat of David Cameron’s 2015 win is not enough. If Mrs May fails to get the thumping majority she hopes for, her position could look less secure than before she called the snap election. Calling an election is a gamble even if the odds remain stacked in her favour.

Mrs May has made this campaign particularly personal and a failure to secure a large swathe of new Tory MPs would be seen a failure of hers. This risks throwing open a Tory leadership contest and the prospect of a hard-line Brexiteer in charge. Boris Johnson waits in the wings.

The effect on the markets would be significant and we could see sterling plunge if there are doubts about May’s leadership. We’ve seen how the pound gains whenever May looks to be driving the agenda – eg after the Lancaster House speech, calling the snap election.

However, last week’s mini flash crash shows there is still a lot of underlying nervousness around the pound as Brexit remains a complete unknown. The FTSE could also take a hit if investors get cautious on UK assets. For the moment the reaction is calm, with cable holding around $1.30 and the FTSE 100 above 7,500. 

Indeed this could be a minor blip. Polls rarely remain static and it’s natural for an opposition party to close the gap at some stage. It’s also common for polls to underestimate the strength of the Conservative vote. The risk for markets is that is the direction of travel in the polls is maintained we end up with even more uncertainty than before Mrs May called for the snap election.

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