Every time a politician says that an election is not a game, there is a clear risk that democracy takes a step back. So on April 8, when Theresa May called a snap UK election for June 8, and said that it was not a game, one should be concerned.

But this is not the reason for this article. I offer no answers, only questions. The situation since the June 23, 2016 referendum has been pure confusion. Nobody on either side of the Leave/Remain divide has any idea how the Brexit process will unfold. The government, charged with managing the divorce, appears not to have a definitive plan, how could it, but has additionally been confounded by internal rifts and special interests. The only mercy, if it can be interpreted as such, is the lack of a credible opposition to challenge its exit … plan.

Why did the PM call a snap election when she strenuously said she would not? Is it an opportunistic tactic to take advantage of Labour’s disarray? Is it that the PM seeks a strong mandate since, as Nicola Sturgeon pointed out, Theresa May is unelected? Or is it to nullify the Cameron manifesto, upon which the 2015 general election was won?

What are the implications for Brexit? Could a stronger Tory majority lead to a softer or more flexible negotiating stance? This seems a bit hopeful as the hardliners are Tories. Is a stronger mandate for the party to imply an endorsement of the PM?

What could upset the widely expected Tory majority? The epic failure of the Lib Dems in the last election followed by the significant rebound they achieved, albeit in one constituency, Richmond Park, shows how volatile the voter sentiment has become. Could a resurgent Lib Dem vote spoil the calculus for a Tory rout of Labour? The Lib Dems were punished for being too moderate a part of the coalition with a hard line Tory government. Could voters seek moderation and vote for the Lib Dems in the coming election?

Could the election become a proxy second referendum on EU membership and if so, how would the votes fall? This is particularly complicated. Is there sufficient ‘buyers’ remorse’ in the country to reanimate the debate? Since the referendum, more new information about the cost and consequences of Brexit have come to light and this could trigger a review of voters’ positions which could result in some surprising results. Any anti Brexit majority constituencies represented by pro Brexit MPs will be interesting battlegrounds.

If indeed a larger Tory majority and a strong mandate for the PM provided the flexibility in negotiating Brexit then clearly this would be positive for the economy. If, however, the election is hijacked by the Eurosceptics then the implications would be quite different.

What if there was a swing to the Lib Dems, which are seen as more moderate and less Eurosceptic? A weaker Tory majority with the Lib Dems in second could be a more moderate combination. Resurgent Labour would ordinarily be less Eurosceptic but the partisan politics could complicate negotiations and would make for a messy Brexit.

Since June 2016, there has been a persistent natural strength to the UK economy which as yet has not had to contend with the reality of Brexit, only the inevitability of it. And yet, sterling remains some 14% below pre referendum levels. It had been in a rising trend just before the referendum, and was on a rising trend since October 2016, after the initial shock. The shock of a snap election has lifted sterling as the market interprets it as a step towards reducing uncertainty, since the election result, at least for now, seems a foregone conclusion. It may not be, but we will have to see how the next two months unfolds. Unless there are negative shocks, sterling should be on a recovery trend to 1.35. Weak sterling has been responsible for rising UK stocks, so strong sterling will likely reverse or stall the rally. With a stable underlying economy, this is likely a buying opportunity, however, we will need sterling to achieve that level and assess the impact on equities. It is too early to buy UK equities.

Weak sterling has only been partly responsible for the strength of the UK economy. The UK has been faster to clean up its financial and banking industry and unclog the plumbing of credit than the continent and this has paid dividends. Policy in the immediate aftermath of the 2008 crisis was even handed and well executed. The right balance between austerity and fiscal stimulus was found. The economy is therefore more efficient and resilient than its continental counterparts, with the exception perhaps of Germany. In the negotiation and implementation of Brexit, a less militant deal would see UK economic strength continue.

Will the May government with a stronger mandate be more or less militant?

How will French, German and eventually Italian elections unfold? Will the rise of Eurosceptics make Brussels more or less militant?

Economic growth seems at last to be picking up in Europe. Will a stronger European economy encourage more conciliatory tones from both sides?

There is another less comforting interpretation: That Theresa May’s calling of a snap election has nothing to do with Brexit or a strong mandate, but is an opportunistic power grab. If this is so, what can we infer? That May expects the Brexit negotiations to be fraught and sufficiently damaging to party unity and popularity. An election at this point prolongs Tory control for 2 extra years. 

China builds bridges while America builds walls. Both strategies are individually compatible. The danger arises when experts appraise each country’s strengths and weaknesses in the context of conflict thus precipitating the need for each to prove themselves in contests neither desire. 

This is perhaps too optimistic a view of human nature. Apparently the ascendancy of one power is a challenge to the established power and often leads to war. If only they could see their shared problems, their shared struggles, they would have less excess energy to dissipate in hostile distractions. 

Volatility is one of those quantities which has a very distinctive time series. If you are shown a volatility chart which was flipped upside down, you would immediately recognize the error. Volatility spikes and fades and repeats. When is the next spike? How big a spike is one looking for.

The foregoing is just observation and not analysis. It suggests that a spike in volatility is due. There is nothing causal on the horizon although there are a few risks. European political risk such as French and German elections or Brexit might be candidates. China’s debt mountain is another. An unconventional US President is another. Inflation could push central banks to tighten more than they plan. Nothing is certain of course but we press on with our observations:

For very large spikes, we see occurences in 1997/8, 2001/2, 2008 and 2011. That’s roughly a separation of 8 years, then 4 years, 4 years and 3 years. From 2011 to date we have a 7 year trough. A vol spike could be around the corner.

For small spikes in more recent history we had Sep 2015, Feb 2016, Jun 2016, Nov 2016, separations of 5 months, 4 months, 5 months. From the last spike in Nov 2016, it is now 5 months. A vol spike could be around the corner.

VIX is at 11.3. You don’t buy insurance when you need, you buy it when you can.

The South China Sea is recognized as Chinese territory. Disputing countries to give up their claims of sovereignty over disputed areas.

Neighbouring countries, Taiwan, Japan, Philippines and Vietnam are offered 999 year leases over their claimed territories for nominal payment with defined renewal terms. The intent is to provide free access and de facto sovereignty to all neighbouring regional economies while providing China with only formal or ceremonial ownership and the opportunity to domestically declare victory.

A regional navy is established with all members supplying assets. Leadership of the navy is on a 4 year rotational basis. The regional navy shall ensure the safe passage of all non-military traffic through the area.

Members’ military vessels not under the purview of the regional navy are not allowed within the zone except with prior notification of the regional navy.

An incursion of the area from non-member countries will be considered an attack on all.

The Accord is to be harmonized with a regional free trade and regional economic cooperation agreement.

The Dow Transports seem to have lost momentum. Judging by similar patterns in recent years, the potential for gain is mimimal and the potential for loss is increased. We are not suggesting huge losses but a range of 7% – 15% seems reasonable across US and Europe. Japan will likely find support from a weak JPY. India continues to be a bullish theme given the demonetization / remonetization theme which will see increased liquidity. China is in consolidation and risk management mode which will see a neutral or hawkish policy stance which is usually bearish for equities.

On the fixed income side, with heightened inflation expectations and an almost guaranteed rate hike March 15, not my expectation, but the market has placed a 96% probability on it, duration is a significant risk.

At the same time credit spreads have compressed acutely and while fundamentals are solid, HY loan defaults are expected to fall further, below 1% possibly, markets just don’t go in a straight line.

Therefore, it seems prudent to reduce equity risk exposure at least in the developed markets (that now includes China), and to reeduce long maturity (not just duration), credit.

Even AT1s which spiked when Deutsche announced its rights issue will likely come under pressure.

De risk. Don’t forget, cash is an asset.