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 wondering who’s still standing.
Labour 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. Never has the electorate seemed so fragmented and dislocated. Labour’s vote share of barely 34 per cent was substantially down on Corbyn’s 40 per cent 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 ‘Securonomics’ to deliver really 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.
The FTSE 250 opened down a tick but then gained momentum to rally 1.2 per cent, while the FTSE 100 was up 0.25 per cent, with European bourses broadly higher, too. Interesting to see Lloyds shares up a bit this morning and the likes of HSBC and StanChart down… pro-housebuilding I would imagine, versus anti global windfall taxes… the blue-chip homebuilders (Taylor Wimpey, Barratt Developments etc) are all higher in early trade. But the win was fully priced, making 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 bond yields also down a bit this morning. Sterling rose overnight and jumped a bit further at 7am but failed to break the Wednesday peak. We are seeing very muted reactions in FX markets as a Labour 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 its own ranks to borrow lots more; or go big and bold early on in the first 100 days? Fair to say we will 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 BoE 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 may see the UK as more secure after an undoubted 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.
Elsewhere today, US non-farm payrolls data later is expected to show a slowdown in hiring to around 190,000, with unemployment steady at 4 per cent and wage growth at +0.3 per cent month-on-month.
France goes to the polls this Sunday for the second round runoffs – a Republican Front may stop the RN from winning an absolute majority. Franco-German spreads have narrowed a bit more but remain elevated.
The Trader is written by Neil Wilson, chief market analyst at Finalto
