UK stock futures rose and the pound held steady after an exit poll indicated Labour will secure its long-predicted landslide election victory, with Keir Starmer set to become Prime Minister on the promise of greater economic stability.
Contracts on the FTSE 100 index rose 0.3%, while the pound was little changed at around $1.276. The official exit poll predicted Labour would win 410 of the 650 seats in the House of Commons, the most since Tony Blair’s landslide victory in 1997.
Before the vote, investors were betting that a victory for Starmer’s centre-left platform would mean an end to policy-driven market crashes. While Labour’s long-standing support for higher taxes and unions has traditionally put it at odds with markets, this time traders are confident the spectre of the UK government bond crisis two years ago will keep the next government in check.
“For the first time in years, The United Kingdom will be a relative island of political stability and this will favor the moderation of risk premiums and discounts in the asset market,” wrote Krishna Guha and Marco Casiraghi of Evercore ISI in a note.
UK government bonds begin trading at 8am in London.
Prime Minister Rishi Sunak’s Conservatives are expected to be reduced to 131 seats, down from 365 in 2019, according to the poll, a result that would likely see some of the party’s biggest names lose support. The Liberal Democrats are on track to get 61, while Nigel Farage’s Reform UK party will get 13.
The exit poll is based on a massive survey of tens of thousands of people after they cast their vote, which has generally made it more accurate at predicting the outcome of UK elections than instant polls of voting intentions conducted during the campaign.
A big Labour victory “should imply an underlying bid tone for sterling”, said Neil Jones, a currency trader for financial institutions at TJM Europe.
Before the vote, Labour put economic stability at the top of its manifesto and pledged to maintain strict spending rules. Rachel Reeves, a former Bank of England official set to become UK finance minister, said the government would not raise three of the country’s main taxes on wages and property.
Other promises included building more homes, creating a publicly owned energy company and moving towards “resetting the relationship” with the EU, although the Labour manifesto also ruled out a return to the single market or customs union.
Fiscal stability and any improvement in the UK’s relationship with the EU would be beneficial for government bonds in the short term and would have positive implications for the pound, TD Securities strategists led by James Rossiter wrote in a July 4 note.
What Bloomberg Strategists Say
“If the final results match the predictions of exit polls, The pound is likely to enjoy strong support in the coming days.”
However, the incoming government is inheriting a sluggish and fragile economy. While inflation has fallen back to the Bank of England’s 2% target, services prices remain sticky. And the rebound from last year’s technical recession appears to be losing momentum, according to the latest growth data. But the BOE’s expected interest rate cuts in the coming months give bond investors another reason to favor government bonds.
Markets had already priced in a Labour victory, as the party had been leading the polls for more than a year before Sunak called a snap election on May 22. That didn’t change after the election date was set, leaving the pound stable, bond volatility low and stocks hovering near an all-time high. The FTSE 100 has even risen 1.5% over the past two days, its biggest gain in almost two months.
“Markets like certainty, so a decisive Labour victory would be welcome,” Nigel Green, founder of wealth management firm deVere Group, wrote in a note. “However, this momentum is likely to be limited as markets have already largely priced in expectations.”
The calm in financial markets contrasts with neighbouring France, where President Emmanuel Macron’s decision to call an early vote in early June triggered a wave of selling.
The yield premium on French bonds over safer German debt has soared to levels not seen since the height of the eurozone debt crisis. The measure was scaled back this week as polls show the far-right National Rally party is unlikely to win an outright majority in Sunday’s vote.
“With political turmoil affecting other developed economies at the same time, this huge majority may “presenting the UK to investors as a kind of political safe haven,” said Lindsay James, a strategist at Quilter Investors.
It is also a far cry from the years when British markets danced to the tune of political drama. The Scottish independence referendum, The Brexit vote and the years of contentious negotiations that followed sent the pound and stocks into fluctuations.
Meanwhile, in the last general election in 2019, investors were concerned about the left-wing policies of former Labour leader Jeremy Corbyn, including nationalisations and worker shareholdings in companies.
Most recently, former Prime Minister Liz Truss’s unfunded tax cuts package rocked markets in 2022 after A sudden spike in bond yields triggered forced selling by leveraged pension fund strategies. Government bonds plummeted, forcing an extraordinary intervention by the Bank of England.
Since then, The development has been a threat to politicians, with both Labour and the Conservatives preaching economic caution during the election campaign.
Former Labour shadow chancellor Ed Balls said the party had put itself in a fiscal “straitjacket” by so dismissing austerity such as tax rises. And Starmer’s target of annual growth of at least 2.5%, which could help fund the extra spending, has been criticised by economists as unrealistic.
Meanwhile, markets are watching for any signs of additional bond issuance to generate funds. UK national debt is at its highest level since the 1960s as a percentage of gross domestic product, and Britain is already engaged in one of its biggest annual borrowing waves in history. Further increases could hurt investor appetite for government bonds.
“For now, markets will be happy that the election is over and that should benefit market sentiment,” said Kyle Rodda, senior market analyst at Capital.Com.
