Financial markets have already priced in a Labour majority, so any deviation from that expectation could cause big volatility on Friday.
Thursday 4 July 2024 22:07, UK
Financial markets are having their first reaction to early signs that the Labour Party will win a record-breaking victory in the general election.
The highly regarded exit poll, conducted by Ipsos for Sky News and other broadcasters, was the first to estimate the size of the likely majority of the vote that Sir Keir Starmer’s party would win.
The 170-seat figure was in line with some projections reported in pre-vote opinion polls.
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Voting ended at 10pm, the time when UK financial markets are closed.
However, there is one indicator that shows how the exit poll numbers are being received by investors.
The pound was being traded across Asia-Pacific at this time, but volumes were thin and it was not helped by the fact that the new trading day was the day after a US public holiday when Wall Street was closed.
The pound initially held steady against major rival currencies such as the dollar and euro.
Market analysts said a landslide Labour victory was widely expected and therefore “priced in”, in technical terms.
The pound rose on the day against the US dollar to $1.27, but this was mainly due to a weaker dollar rather than any growing support for the pound, they added.
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After the exit polls were released, the euro recovered some against the euro, trading at 1.18.
“Institutional investors have been very negative on the pound for a long time, but they’re actually coming into this election in a fairly neutral position,” said Michael Metcalfe, head of macro strategy at State Street Global Markets.
He cited rising political risks in countries such as France, where a second round of parliamentary elections is due to be held in three days, and the United States, where a presidential election is due to be held in November, as the reason for this.
“The weird thing is that the UK ended up somewhere in the middle,” Metcalfe said, “and I don’t think the outcome was ever in doubt at any point.”
The FTSE 100 and domestically focused FTSE 250 ended Thursday in positive territory, up 0.9% and 0.3% respectively, in line with other European markets.
Following the availability of the exit poll results, trading platform IG predicted that the FTSE 100 would open 0.4% higher in Friday trading, with the suggested figure set to fluctuate until the opening bell at 8am.
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Commenting on the outlook, Dan Coatsworth, investment analyst at AJ Bell, wrote: “The last time there was a handover from the Conservatives to Labour in power the UK stock market barely moved, and the same could happen if Keir Starmer’s party is declared the winner.”
“Investors long ago priced in the impact of a Labour victory in the 2024 general election, with opinion polls pointing to a Labour landslide victory throughout the six-week campaign.
“Markets are taking a cool head at the prospect of a Labour government, with Labour’s manifesto promising no tax increases and what feels like a charm offensive for the City.”
“It takes a big surprise to cause a noticeable move in the market.”
The election was called by Rishi Sunak on May 22nd.
Today, the pound is only slightly stronger against the dollar, the world’s reserve currency, than it was then.
It has struggled to make headway recently, with the dollar receiving heavy support from the U.S. central bank’s delayed interest rate cuts.
London-based currency trading, along with bond and stock markets, will be a better gauge of the reaction.
Jeremy Corbyn’s Labour party in 2019 was widely seen in the City as a negative for the economy, but under Sir Keir’s leadership the party has shifted into more traditional Conservative territory.
Labour has promised to focus on boosting economic growth, improving relations with the EU and providing a clear policy course for business.
The party is capitalising on investor discontent at the last parliament amid a series of suicidal acts, including the aftermath of the Truss mini-budget.
Even if Labour wins and Rachel Reeves becomes Britain’s first female Chancellor of the Exchequer, her honeymoon period is likely to be short-lived.
Finances are tight, mainly due to fighting the coronavirus pandemic and supporting energy bills after Russia’s invasion of Ukraine, but Labour’s pledge not to raise mainstream taxes will limit the party’s room to spend.
Nevertheless, a flurry of requests for what is on offer is expected from investors and business groups ahead of the new parliament’s first budget, due in the autumn.
