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Markets relaxed

about British poll

prospects

LONDON: British financial markets expect the country's ruling Conservatives to suffer another humiliating setback in next week's local elections, but will take the outcome in their stride, analysts said on Thursday.

"If anything has been discounted in this game, it is that the Conservatives are going to get a drubbing next week," Natwest Markets bond and currency strategist Kit Juckes said.

"With the market already anticipating a general election defeat, their losses would have to be very high to provoke any reaction now at all."

Around 3,000 seats are up for grabs in the May 2 local authority elections, which fall almost exactly a year before the final deadline for a general election.

Economists predict the Conservatives, who now hold an estimated 1,150 of those seats, will lose 600 to 700. Losses of over 800 will send tremors through financial markets, while anything below 500 would be viewed as a good result.

"I think we're going to see a huge protest vote," DKB International economist Nick Stamenkovic said.

"It will reinforce the market's view that political pressures will persist and (Prime Minister John) Major's time is runnning out -- but any negative impact on sterling will be short-lived."

The pound could fall by up to 1-1/2 pfennigs on a dismal poll outcome for the Conservatives, but any weakness would be temporary because the dollar's strength was very supportive, he said. Sterling was trading at around 2.30 marks on Thursday.

The chances of a Conservative rout are high following the opposition Labour Party's overwhelming victory in a by-election two weeks ago, analysts say.

That result whittled Major's parliamentary majority to just one, raising the spectre of an early general election. The embattled Conservatives are trailing Labour by more than 30 points, according to recent opinion polls.

"You will be looking at losses in the region of 700 if not more. If you see massive losses the market could come under short-term pressure," PaineWebber analyst James McKay said. McKay thinks losses of more than 850 seats could make British government bonds, or gilts, under-perform German bunds, and pry the spread between 10-year bonds further apart by 0.05 percentage points.

The spread, which reflects the greater risk international investors feel they incur by buying British government bonds instead of German ones, was 1.86 percentage points on Thursday, near recent highs.

"I would view that as a short-term buying opportunity. Gilts are good value and I don't see a massive reaction," McKay said.

Equity analysts believe the FTSE-100 share index could also dip, albeit briefly, by 30 or 40 points on Conservative losses of more than 800 seats.

"I think it would be fair to say overseas investors would be concerned if they lost more than two thirds of their seats. They would see the chances of recovery in time for a general election as rather slim," Yamaichi analyst Nigel Hawkins said.

Juckes said financial markets would react much more negatively to anything which suggested a general election would be brought forward from May 1997, the last possible date.

"It is information closer to the event, which confirms or changes perceptions, that will have a much bigger impact on sentiment," he said.-Reuter