Monday, December 23, 2024

Markets react to Labour election win as focus turns to interest rates

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New Labour prime minister Keir Starmer will set out his stall in the King’s speech on 17 July. (REUTERS / Reuters)

The Labour party stomped to a landslide victory overnight on Thursday, with 412 seats in the UK parliament as of midday on Friday.

Eleven members of the outgoing Conservative government lost their seats, in a wipeout for prime minister Rishi Sunak.

Markets were relatively calm in the aftermath, having expected a Labour victory. We’ve rounded up reactions and expectations from analysts and experts as to how the next weeks and months will play out.

The pound and FTSE 100 (^FTSE) were calm on Friday in London, as there were no big surprises from polling.

“There is always a sense of nervousness ahead of markets opening the day after a general election, but we only get extreme volatility when investors are caught by surprise,” said Dan Coatsworth, investment analyst at AJ Bell.

Read more: Pound rises after Labour’s landslide victory in UK general election

“This time round, there was nothing to get heads spinning as the result was widely expected. Instead, investors appeared to welcome the news with open arms.”

Housebuilders were among the winners due to manifesto pledges to invest in creating new homes.

Barratt Developments (BDEV.L), Taylor Wimpey (TW.L) and Persimmon (PSN.L) were all among top gainers in the FTSE 100 index. All three stocks rose more than 3% in early trade.

“The relaxed mood across financial markets reflects the fact that Labour’s landslide win had long been predicted by the polls and therefore was already baked into market prices,” said Victoria Scholar, head of investment at Interactive Investor.

“Starmer tried to appeal to the markets during his election campaign by positioning Labour as a pro-business party and refraining from announcing plans for major tax increases.”

The muted response from both indices and the pound comes in contrast to the disastrous Liz Truss mini-budget of 2022, when the pound crashed out and investors rushed to sell London equities.

With relative stability from the Labour party ahead, the future could look bright for the market mid-caps.

“A Labour government could pave the way for an outperformance of more domestically focused mid-cap stocks if Keir Starmer’s party works to ensure fiscal stability and helps to lift confidence in the UK economy,” said Scholar.

Read more: What the new Labour government means for your money

“Theoretically, we could see a snowball effect whereby the more the UK market goes up in response to the election, the more people start to get drawn in. There is no guarantee that will happen, but such a response would certainly be long overdue given how UK equities have been unloved since the Brexit vote in 2016,” added Coatsworth.

The next steps for Starmer and his team will be to set out their stall in the King’s speech on the 17 July.

“Here, markets will get a real sense of Labour’s key policy priorities for its first year in government, including potentially what could feature more heavily in its Autumn Statement,” said analysts at Deutsche Bank Research.

The four things that matter most for this will be investment (via its National Wealth Fund), defence, planning reform, and trade with Europe, analysts added, as these will pose meaningful contributions to GDP growth if implemented correctly.

With interest rates in the hands of the Bank of England (BoE), incoming chancellor Rachel Reeves will be focused on policies that help keep inflation in check.

Expectations at the moment are for a quarter point basis rate cut by the BoE in August, as the Monetary Policy Committee meeting was put on hold in July due to the election.

There have been tentatively positive signs in the UK economic data recently, with real wages finally starting to improve and inflation having come a long way down and there are early signs of an earnings recovery,” said Michael Born, investment research analyst at Morningstar.

“The UK is not without its challenges, but if we see continued strong economic performance under this new, and importantly stable government, and rate cuts by the Bank of England, there is definitely a case to be made that the valuations and levels of yield available to UK investors should make the country an attractive prospect for asset allocators.”

The near future should be plain sailing for the pound, which barely reacted at all to the news of a democratic changeover.

“With the result in line with expectations, we expect sterling to remain broadly unchanged following tonight’s results,” said Deutsche Bank.

“As we noted earlier this week, from a EUR/GBP perspective attention will quickly turn to (a) the French election over the weekend (though the risk premium for this event has also fallen materially) and (b) the next set of UK data that will determine whether the BoE can cut rates in August.”

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