Friday Jul 5 2024 13:58
7 min
1. Labour Party wins big in UK election, Tories see worst defeat in modern history
2. Markets see muted reaction as Labour Party win fully priced in
3. Attention turns to BoE, French second round, US presidential election
5. NFP data expected to show slowdown in hiring, France goes to the polls for second round
"War does not determine who is right. only who is left" – Bertrand Russell.
Politics can feel like war sometimes – (the latter is only a continuation of the former by other means, after all) – and the Conservatives are looking around the misty, body-strewn battlefield of the UK election and wonder who’s still standing.
The Labour Party won big. The Tories were not wiped out, but it was very, very bad. A lot of the generals were shot too. The Lib Dems had a spectacular night, the SNP had a spectacularly bad night. Reform won seats – including Nigel Farage at the 8th time of asking – and won a substantial percentage of the popular vote. Never has the electorate seemed to be fragmented and dislocated.
Labour’s vote share of barely 34% was substantially down on Corbyn’s 40% in 2017. This is not 1997. Starmer’s mandate is not as secure as the number of MPs would suggest. With a lot of skinny majorities, it could be harder for Starmer than the electoral map looks and for Rachel Reeves’ “Securonomics” to deliver deep economic reforms. The Tories seemingly had a rock-solid position with a majority of 80 in 2019. A lot can change in politics. Starmer’s main opposition could be from within his own ranks.
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As for stocks: the FTSE 250 opened down a tick but then started to gain momentum to rally 0.4%, whilst the FTSE 100 index was up 0.25% with European bourses broadly higher. A very limited read across from the UK election in this.
Interesting to see Lloyds shares up a bit this morning and the likes of HSBC and Standard Chartered down — pro-housebuilding vs. antiglobal windfall taxes, I suppose. The blue-chip homebuilders (TW, BDEV etc.) are all higher in early trade. The Labour Party win was fully priced to make it a bit of a non-event for markets.
Gilt yields are down a touch, but that is part of a broader move with German bund yields also down a bit this morning. Sterling rose overnight and jumped a bit further at 7 a.m. but failed to break the Wednesday peak.
We are seeing very muted reactions in FX markets as a Labour Party win was a) well priced and b) not scary for the markets – at least not yet. The question is now – just how bold does PM Starmer go? Is it a case of ‘steady as she goes’ in terms of economic policy so as not to frighten the horses, and face pressure later from within their own ranks to borrow lots more; or go big and bold early in the first 100 days? Fair to say we get the usual kitchen sink job from an incoming chancellor by blaming it all on the last guy.
Markets may like less of an overhang of political uncertainty. They may like some pro-growth measures. The reality of higher taxes has not bitten yet. In terms of the pound, I think a lot depends on the fiscal credibility of the government, which remains untested. Has the Overton Window shifted in favour of greater borrowing? I’d say ‘yes’ but the market may not agree…
A lot of also depends on France and the US elections this year.
It will also depend on respective monetary policy moves and the Bank of England may well be about to embark on a faster and deeper rate cutting cycle than either the Fed or the ECB. This could see sterling come under pressure.
Investors will look at some potential policy specifics – housebuilding, long-term fixed mortgages, consumer protection measures, moves to boost capital markets, pension fund rules, any windfall taxes on banks or energy firms, and so on.
In a much broader sense, you think that investors are going to take a different longer-term view of the UK. They may see it as more secure after undoubtedly a degree of policy uncertainty overhang in recent years – the dullness dividend. We shall see how long this lasts though, with the fragmentation in the electorate potentially creating unforeseen pressures.
Nonfarm payrolls data later is expected to show a slowdown in hiring to around 190,000, with unemployment steady at 4.0% and wage growth at +0.3% month-on-month.
France goes to the polls this Sunday for the second-round runoffs – a Republican Front may stop Marine Le Pen’s National Rally (Rassemblement National, RN) from winning an absolute majority. Franco-German spreads have narrowed a bit more but remain elevated.
Bitcoin dropped further below the trend support and below its 200-day SMA.
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