Wait and see

Like the rest of us, investors are in wait and see mode. If it happens, and that is a big if - the debate may now turn to what, precisely, we might see from a Conservative minority government on the subject of the Budget.

Traders sold the pound this morning; it has now lost several cents against the dollar. But with so many other countries also under pressure, there's a shortage of currencies to fall against.

On a trade weighted basis, the pound has not been badly hit today, though of course it has fallen plenty this year.

As others have reported, gilt futures fell sharply overnight, and the FTSE fell sharply at the opening. But there's been no rout - in fact so far the FTSE is having a better day than many markets on the Continent.

The leading ratings agencies have all come out saying the election result will not change their immediate view of the UK - or threaten its AAA credit rating anytime soon. This, from one senior analyst at Moody's:

"Moody's stance assumes that the incoming economic team can muster convincing parliamentary support for a fiscal adjustment that is no looser nor slower than was outlined by all three political parties during their respective pre-election campaigns...The lack of a one-party majority will undoubtedly create political uncertainty in the short and perhaps also the medium to longer term. Nevertheless, Moody's view is that it is not the political but the policy outlook that matters most."

Establishing what, exactly that policy outlook will be is of course all that we will be talking about for the coming hours and days. Let me just throw down a few guide posts.

On two of the big economic issues of the election - when to cut borrowing and how much to raise taxes - the Liberal Democrats and Conservatives were on different sides.

The Conservatives wanted to cut spending this year - the Liberal Democrats said it was important to wait. The Conservatives went into the campaign promising a net tax cut - relative to labour. The Liberal Democrats promised a small tax rise.

This doesn't like fertile territory for a deal - tacit or otherwise.

But, luckily, "the big economic issues of the election" were not the big economic issues facing the country. The most important question for any international investor is whether the next British government will be committed to cutting the deficit.

On that question all three parties agree, and even on the details, the Liberal Democrats and the Tories are closer than you might think.

Both Vince Cable and George Osborne have said in the past that the government's deficit reduction plan was not ambitious enough.

And both have expressed a desire to limit tax rises on labour income - though the Liberal Democrats channelled this desire into radical tax reform for the lower paid, not delaying Labour's National Insurance rise.

You can, in short, see the outlines of a budget which the Liberal Democrats could support on the day: maybe £3bn in spending cuts this year instead of £6bn; maybe using the proceeds of the bank levy to pay for a targeted tax cut for the low-paid. The problem, for investors, would be what comes before that - and what comes after.

We don't yet know that the Tories will be in the Budget-writing business in a few weeks time. The question of political reform could stand in the way.

And even if they are, we can't know whether the Liberal Democrats will continue to support the Conservatives down the road, when the going gets tough and voters are feeling the effect of cuts.

These and other big question marks will hang on British assets for a while to come - even if investors today are giving us the benefit of a lot of doubt.