The European stock markets and the British pound reacted negatively to the announcement that Gordon Brown plans to resign later this year. Financial analysts are watching the British political situation closely and say uncertainty could further damage the markets.
British politicians are negotiating to form a coalition government. The third place Liberal Democrats could pair either with the Labor Party, which came in second, or the Conservatives, which won the most seats but not a majority.
David Jones the chief market strategist at IG Markets says the financial markets seem to have a favorite.
"I think the preference is for a Conservative Liberal alliance and it's really not so much a political preference, it's that they would have the most seats in Parliament," explained Jones.
Howard Archer is the chief economist for IHS Global Insight a financial analysis company. He says the British currency is being hurt by the possibility of the other political combination.
"Sterling is not being helped by growing speculation it could actually be a Labor-Lib-Dem coalition," said Archer.
Analysts say they want a stable government that can make decisions and cut Britain's $241-billion deficit as soon as possible, and because the Conservatives and Liberal Democrats would together have an outright majority they are the stronger coalition choice. Archer says for now the stock markets are taking a wait and see attitude.
"The markets can't react too much one way or the other because they don't know what the final outcome's going to be, but the longer the uncertainty goes on, the more the markets will be sort of worried that any agreement between the parties is going to be fragile anyway because it's taken them so long to hammer out an agreement," added Archer.
Jones says the longer the negotiations take, the more fragile the markets.
"I think if it drags on much past Wednesday I think we'll see further pressure on the pound," noted Jones.
Archer says once the makeup of the new government is decided, the markets will assess its viability and act accordingly.
"If they take the view that firstly the government is not likely to last for very long, and secondly it's going to find it very, very difficult to take strong action on reining in the fiscal deficit then I think you could see a real sell-off of UK assets," noted Archer.
The economy was a central theme during the British elections, now the markets are watching closely to see who emerges as a winner.
