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Soft Brexit Hopes Temper UK Election Shock as May Hangs on as PM

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Soft Brexit Hopes Temper UK Election Shock as May Hangs on as PM

The latest in a string of sensational political upsets to roil Western democracies has left the U.K.'s Conservative Prime Minister Theresa May clinging to power thanks to the support of a small Northern Irish party instead of boosting her parliamentary support as she had hoped. While market reaction, including the sharpest fall in the pound in eight months, has been tempered by hopes for a softer Brexit, she must now hold together a fragile majority as she tries to strike a deal on leaving the European Union with a hard-bargaining Brussels.

The Conservatives fell short of an overall majority in the June 8 election, losing 12 seats. The party secured 318 seats in the 650-seat parliament, with one constituency left to report, but indications June 9 that Northern Ireland's Democratic Unionist Party, with 10 seats, would support them allowed May to visit the Queen to receive assent to form a government.

While the DUP is pro-Brexit, it is opposed to the installation of passport controls on the border with the Republic of Ireland. Investors calculate this might lead May to soften her line in the exit talks, reducing the chance that the U.K. could walk away with no trade deal at all and increasing the possibility of an arrangement like that enjoyed by Norway, which has access to Europe's internal market in return for abiding by EU rules. On the other hand, May's hopes when she called a snap election in April of boosting her majority in order to give her more negotiating leeway by allowing her to ignore the more strident euroskeptic voices within her own party, have now been dashed.

"Political uncertainty has increased: the British negotiators will head to Brussels for talks due to begin June 19 without a clear agenda as consensus within parliament regarding the type of Brexit remains elusive," Barclays analysts Fabrice Montagne and Andrzej Szczepaniak wrote in a note, adding that it was premature to identify any other effect of the elections on the talks other than to inject additional uncertainty.

Brexit: Harder or Softer?

"It is still too early to say whether the outcome of the election would alter the probability of an orderly hard versus an orderly soft Brexit. In practice, slim majorities tend to water down policies as the government is not able to take strong positions," they said, adding that pro-government MPs might continue to support calls by May for exiting the European Court of Justice and cutting immigration which are incompatible with continued access to the single market.

The pound tumbled 1.7% against the dollar to $1.2742 at 8:44 a.m. ET, retracing earlier losses of as much as 2.3% in its worst trading day since October. London's FTSE 100 stock index, many of whose companies have foreign earnings, jumped 0.5%.

The currency has sunk from over $1.40 since last June's referendum vote to leave the EU, which proved to be the first of a series of global political developments which seemed to turn long accepted wisdom on its head, including Donald Trump's victory in the U.S. presidential race and the election of Emmanuel Macron in France at the head of a completely new political movement.

The pound's fall was broken as investors bet that the DUP's hopes for a soft Irish border might push May toward a softer Brexit, Nomura currency strategist Jordan Rochester said. Pro-Brexit Conservative MPs might now also moderate their positions, he added.

"I think they'll be doing a bit of soul searching, because if they don’t sort out their core message then whenever the next election is, it might not be them in No. 10," he said, referring to No. 10 Downing Street, the official residency of the prime minister.

Pound Fall Limited

Some strategists were surprised that the pound did not fall more on the loss of the Conservative majority, Rabobank currency strategist Jane Foley said.

"Whether Theresa May is prime minister or not, if the Tory party is forced to rely on non-Tory votes, the market is beginning to think that parliament is going to be a little bit softer on Brexit and that therefore she might have to make some compromises," she said, adding that if Conservative rivals try to displace the prime minister as punishment for her poor election campaign then the market will evaluate them according to their position on Brexit.

Any candidates such as Foreign Secretary Boris Johnson, or David Davis, secretary of state for exiting the European Union, would be seen negatively, due to their euroskeptic views, Foley said, while someone like Home Secretary Amber Rudd, seen as more moderate, would be welcomed by investors.

Senior Conservative voices including former minister Anna Soubry and former finance minister George Osborne have already said May should consider stepping down.

The European Union's budget commissioner Guenther Oettinger told German radio he was unsure if Brexit negotiations could begin on time, adding that a weak negotiating partner could result in a poor outcome for all sides.

Polls on the eve of the elections had predicted a Conservative lead of between 13 and 1 percentage points. The Labour Party, led by left-winger Jeremy Corbyn, added 31 seats to 261, in a result which made a nonsense of pundits' predictions after a campaign in which he appealed to young people with promises to abolish university tuition fees, re-nationalize major infrastructure and boost taxes on corporations and high earners. The result consolidated the control over the main opposition by Corbyn, for long a marginal figure within his own party but whose rise echoes support for fellow left-wing insurgents like Bernie Sanders in the U.S. and Jean-Luc Mélenchon in France.

While the election result may have unpredictable consequences for the U.K.'s relationship with the EU, it did however reduce one other key source of political uncertainty. The Scottish National Party lost more than a third of its seats, taking its total to 35 and sapping momentum toward another referendum on independence for Scotland.

Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

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S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.

How Can Banks Apply a Quantitative Lens on Climate Risk Exposure

Aligning with the Recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD)

Dec. 03 2018 — The signals are clear: central banks and regulators are stepping up action to address the potential systemic risks to financial markets that climate change poses.

This means it will become increasingly necessary for banks to develop a deeper understanding of how climate issues could affect their businesses and those they finance. By effectively managing and responding to these issues, banks can not only help mitigate the risks, but also seize the opportunities presented from the transition to a lower-carbon economy. Trucost has worked with banks for more than a decade to support their climate-related analysis. This paper provides practical guidance to help banks manage and report key climate-related metrics, no matter what level of ambition they may have.

This paper is organized into five sections:

I. What is the TCFD Framework?

II. Measuring the Carbon Footprint of a Bank

III. Translating Climate Exposure into Financial Risk

IV. Incorporating Scenario Analysis

V. Creating Opportunities

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