UKIP gains risk sparking volatility in financial markets, say analysts

The political gains made by the UK Independence Party (UKIP) are likely to spark short-term volatility in financial markets, financial experts have warned ahead of the hotly-contested by-election in Rochester and Strood.

The Conservative party will face a strong UKIP challenge in the shape of Mark Reckless, whose defection from the former to the latter triggered the poll, providing another indication of sentiment ahead of next May’s general election.

Reckless is an overwhelming favourite to win, with several bookmakers offering 1/100 odds on his delivering a UKIP win.

Financial analyst Rob Wood at Berenberg said UKIP reaching two MPs would be a "momentous moment" for the party, setting it up to potentially capture upwards of a dozen seats at the general election which would have much wider implications.

"We worry more about the chances of Brexit than the general election," he said, even though UK support for EU membership is at a 23-year high in the UK.

"The economy and markets could cope with some mild political uncertainty, but not the huge disruption from an EU exit. Tonight’s vote matters for that risk.

"The stronger UKIP get, the more pressure Prime Minister Cameron faces to announce increasing extreme, euro-sceptic, policies to potentially appease the electorate and ward off in-fighting in his party."

Cameron's recent rhetoric about capping immigration from the EU, which received a frosty reaction from Germany's Angela Merkel and other EU leaders, is an example of the efforts made to appeal to this section of the electorate and within his party.

"The more UKIP forces Cameron’s hand, the more he will rile his partner’s abroad, and the less chance he has of successfully renegotiating the UK’s relationship with the EU ahead of the end-2017 Brexit referendum he has promised."

Although, "when push comes to shove" he said he expected the UK to remain in the EU, UKIP's rising power was a risk that was "worth watching very carefully".

Nigel Green, chief executive of financial consultancy DeVere Group, also warned that UKIP's gains were "changing the political landscape" in Britain which was "likely to spark short-term volatility in financial markets".

He explained that further possible defections of MPs to UKIP and the wider growing Eurosceptic sentiment in the UK during the election campaign will bolster the chances of Brexit.