UK markets rally as Conservatives head for election victory

By Jamie McGeever

LONDON, May 8 (Reuters) - British stocks were called to open sharply higher and sterling surged on Friday as early British election results showed Prime Minister David Cameron's Conservatives poised to return to power without the need of a formal coalition.

Initial results confirmed the shock results of an exit poll late on Thursday, appearing to remove any chance of the hung parliament that had worried financial investors in the run in to Thursday's vote.

With Cameron's Tories generally perceived to be more market-friendly than the opposition Labour Party, the FTSE 100 was poised to re-test its recent highs. Sterling was on course for its biggest daily rise against the euro and dollar since 2009.

"The odds were stacked against such a decisive outcome. This result is far less complicated than the markets' worst fears," said Bill O'Neill, Head (Other OTC: HEDYY - news) of the UK Investment Office at UBS Wealth Management.

But while the short-term political risks may have diminished, the longer-term risk of Britain holding a referendum to leave the European Union remains, particularly for sterling.

"We have some of the near-term political risks being removed but there are a couple of factors that are going to work against sterling for the longer term," said Ian Stannard, senior currency strategist at Morgan Stanley (Xetra: 885836 - news) in London.

"The risks of an EU referendum will come into focus and fiscal austerity under the Conservatives may also mean that the Bank of England keeps interest rates lower for longer."

Sterling jumped more than 1 percent against the dollar to trade above $1.55 for the first time since late February, and rallied 2 percent against the euro to 72.40 pence per euro.

Spreadbetters called the FTSE 100 index up by 95-96.6 points, or around 1.4 percent higher. That would take the index to just under 7,000 points, close to last month's record high of 7,122.74 points.

"The likelihood of the Tories remaining in power is a bullish outcome for the markets. We should be pushing back towards those earlier all-time highs," said Thames Capital Markets trader Gerren O'Neill.

Trading in British gilts opens at 0700 GMT. The benchmark 10-year yield hit 2.07 percent on Thursday, its highest since November last year, before ending the session at 1.92 percent. (Reporting by Patrick Graham, Sinead Cruise and Sudip Kar-Gupta, writing by Jamie McGeever)