(Bloomberg) — UK equity-index futures climbed and the pound held recent gains after the Labour Party won a majority of seats in Parliament, giving it a transparent mandate to deliver on its pledge for greater economic stability.
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Contracts on the FTSE 100 Index advanced 0.2%, while the pound was little modified around $1.277. Labour passed 326 of the 650 seats within the House of Commons, securing its long-predicted landslide election victory. Rishi Sunak conceded defeat and Keir Starmer is now set to turn into prime minister.
Heading into the vote, investors were betting that a win for Starmer’s center-left platform would mean an end to policy-induced market meltdowns. While Labour’s historic support for higher taxes and trade unions has traditionally put it at odds with markets, this time traders are confident that the specter of the UK’s gilt crisis two years ago will keep the following government in check.
“For the primary time in years, the UK will probably be a relative island of political stability and this can favor moderating risk premia and asset market discounts,” Evercore ISI’s Krishna Guha and Marco Casiraghi wrote in a note.
UK government bonds start trading at 8 a.m. in London.
Read: Watch UK Banks, Homebuilders as Labour Heads for Election Win
In response to the official exit poll, Labour is on the right track to win 410 of the 650 seats, probably the most since Tony Blair’s 1997 landslide victory. Sunak’s Tories are projected to be reduced to 131 seats, compared with 365 in 2019, a result that might likely see a few of the party’s biggest names voted out. The Liberal Democrats are on the right track for 61, with Nigel Farage’s Reform UK on 13.
The exit poll is predicated on a mass survey of tens of 1000’s of individuals after they solid their ballots. That has generally made it more accurate in predicting the consequence of UK elections than snapshot surveys of voters’ intentions conducted throughout the campaign.
A big victory for the Labour party “should imply an underlying bid tone for sterling,” said Neil Jones, a foreign-exchange salesperson to financial institutions at TJM Europe.
Before the vote, Labour placed economic stability at the highest of its manifesto and pledged to stick with tough spending rules. Rachel Reeves, an ex-Bank of England staffer who’s set to turn into the UK’s finance minister, said that the administration wouldn’t raise three of the UK’s key taxes on wages and goods.
Other guarantees included constructing more houses, making a publicly-owned energy company and moving to “reset the connection” with the EU — though Labour’s manifesto also ruled out a return to the one market or customs union.
Fiscal stability and any improvement within the UK’s relationship with the EU can be supportive of gilts within the near term and have positive implications for the pound, strategists at TD Securities led by James Rossiter wrote in a note on July 4.
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“If the final word results are consistent with the exit poll prediction the pound is more likely to be well-supported in the times to come back.”
— Ven Ram, cross-asset strategist.
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Still, the incoming government is inheriting a sluggish and fragile economy. While inflation has fallen back to the Bank of England’s 2% goal, prices for services remain sticky. And a rebound from last 12 months’s technical recession appears to be losing momentum, based on probably the most recent growth data. But expected interest-rate cuts by the BOE in the following few months give bond investors one more reason to favor gilts.
A Labour win has been widely priced in by markets, because the party held a commanding lead in polls for well over a 12 months before Sunak called a snap election on May 22. That didn’t change after the election date was set, leaving the pound regular, bond volatility low and stocks hovering just off a peak. The FTSE 100 even rallied 1.5% up to now two days, probably the most in nearly two months, while global equities prolonged a record high.
“Markets like certainty and so Labour winning decisively will probably be welcomed,” Nigel Green, founding father of wealth management firm deVere Group wrote in a note. “This boost is more likely to be limited, nonetheless, because the markets have already largely priced within the expectation.”
The calm in financial markets puts the UK in contrast with neighboring France, where President Emmanuel Macron’s decision to call a snap vote in early June ignited a selloff. The yield premium on French bonds over safer German debt at one point rose to levels last seen within the depths of the euro-area debt crisis. The move pared this week as polls show the far-right National Rally is unlikely to attain an absolute majority in a vote Sunday.
“With political turmoil hitting other developed economies at the identical time, this huge majority may present the UK to investors as somewhat of a political shelter,” said Lindsay James, a strategist at Quilter Investors.
It’s also a far cry from years where UK markets danced to the tune of political drama. Scotland’s referendum on independence, the Brexit vote, and the years of fractious negotiations that followed caused gyrations within the pound and stocks. On the last general election in 2019, meanwhile, investors fretted over former Labour leader Jeremy Corbyn’s left-wing policies including nationalization and employee stakes in corporations.
More recently, former Prime Minister Liz Truss’s package of unfunded tax cuts roiled markets in 2022 after a sudden rise in bond yields triggered forced selling from leveraged pension fund strategies. Gilts plunged, forcing a unprecedented Bank of England intervention.
That event has loomed large over politicians since, and each Labour and the Conservatives preached economic caution throughout the election campaign. Former Labour shadow chancellor Ed Balls said the party had put itself right into a fiscal “straitjacket” by ruling out each austerity and tax rises. And Starmer’s goal for annual growth of a minimum of 2.5%, which could help fund additional spending, has been criticized by economists as unrealistic.
Markets, meanwhile, are watching closely for any signs of additional bond issuance to generate funds. The UK national debt is at the best levels because the Sixties as a percentage of gross domestic product, and Britain is already committed to certainly one of its biggest annual borrowing sprees on record. Further increases could hurt appetite for gilts amongst investors.
“For now, the markets will just be glad to get an election over and done with, and that ought to profit market sentiment,” said Kyle Rodda, senior market analyst at Capital.Com.
–With assistance from John Cheng and Abhishek Vishnoi.
(Updates with Labour win from first paragraph)
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