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9 Jul 2024 | 5 minutes to read
While recent election surprises have caused volatility in markets, the UK general election provided markets with a dose of the expected.
Ahead of the election, Labour had long held a large lead in the polls, a prospect seemingly met with equanimity by the market. This is in stark contrast with the market mood ahead of the previous election, when Labour was controlled by the hard left wing of the party.
In the weeks running up to polling day, UK assets enjoyed greater support than had been the case for a while, with a pickup in fund flows into UK assets, but market moves following the result were more muted, reflecting the well-anticipated outcome. On Friday, sterling crept +0.4% higher, while the UK mid-cap index opened c. +2% higher, later giving back c. 1%. At a sector level, domestic UK names have benefitted from a continued improvement in sentiment. Labour has spoken extensively about proposed planning reforms, which should boost housebuilder stocks, though such reform would take time to implement.
Ultimately, the market reaction is likely to be determined by how near term policy changes affect the outlook for growth. The Autumn budget will provide key information on the Prime Minister’s tax and spending plans, and is expected sometime from mid-September onward, accompanied by refreshed forecasts from the Office for Budget Responsibility (OBR). Labour has also pledged to publish a roadmap outlining plans for corporation tax and employment rights for the whole parliament in its first 100 days, which falls in October. By December, Labour will also publish public sector funding plans, under the spending review, with additional funding needed to avoid dramatic funding cuts to some areas of public spending.
In terms of monetary policy, the new government is likely to have a modest impact on the path of policy. Little room remains if the new Chancellor is to stay within the fiscal rules, and Chancellor Reeves has ruled out a significant share of possible revenue raising measures. With the memory of the Truss mini-budget still fresh, nervousness around raising borrowing persists. This doesn’t leave much fiscal room, and thus the inflation and growth implications are likely to be marginal.
While US politics is drawing attention, US monetary policy remains key for markets and last week’s June employment report provided further support for the case for interest rate cuts.
While non-farm payrolls came in above expectations at 206,000, this was a deceleration from May and there were significant downward revisions to the April and May figures. Furthermore, strength in employment came from the government sector, as opposed to private payrolls, which were soft at 136,000.
The household survey, which is used to estimate the unemployment rate, also continued to paint a softer picture - indicating a rise in employment of 116,000, after a 408,000 decline in May. Participation also moved up from 62.53% to 62.59%, raising the unemployment rate to 4.05% in June from 3.96% in May.
The May Job Openings and Labour Turnover Survey (JOLTS) also painted a picture of easing. While the labour market remains somewhat tight, the jobs to unemployed worker ratio is now back to pre-pandemic levels and openings and hires continue to decline on a year-on-year basis, while redundancies rise.
Futures prices continue to suggest that the Federal Reserve (Fed) will cut rates for the first time in November, though economists see September as a possibility.
After a series of shock twists, the second round of French elections continued to surprise investors, with an electoral upset and hung parliament. After far right National Rally (RN) party established a convincing lead in the first round of legislative elections, they finished third in the second round, after centrist and left-wing parties cooperated to gain a share of the vote in tactical seats.
Exit polls now show the left-wing alliance of the New Popular Front (NPF), a coalition of France Unbowed, Greens, Socialists and Communists, securing 182 seats, short of a majority. Macron’s Liberal Centrist bloc, Ensemble, won 168, and far-right RN 143 seats.
Markets reacted negatively to Macron calling the snap election and to the first round results, but asset values recovered over the week, as it became clear that NPF and Ensemble would cooperate. The benchmark French stock market index, the CAC 40, has recovered around 50% of its losses since the election was called.
The election outcome prolongs uncertainty. Left-winger Jean-Luc Mélenchon, perhaps the most prominent figure in the NPF alliance, cannot form a stable government without support from another party and yet seems loathe to cooperate with the centrist bloc. Even a successful cohabitation government is likely to mean political gridlock. This arrangement also imperils France’s efforts for reform, with fresh elections likely next year.
While the risk of a Eurosceptic party has receded, NFP’s fiscal policies are a concern for investors, at a time when France’s budget deficit of 5.5% is above the EU’s 3% deficit rule.
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