Written by Dominic Williams
Labour wins big, as markets remain calm, but challenges lie on the road ahead.
The predictions of Labour’s landslide victory materialised in the early hours of Friday morning, with the party winning 412 seats out of 650 in the House of Commons. The victory did not come as a shock, given that polls in the run-up to the election had predicted this outcome. Although Labour’s national vote share has barely changed since the 2019 election, increased support from Scotland boosted their seat count, as Labour took seats from the SNP. This victory gives Labour a strong mandate to move forward with their pledges. It is expected that they will remain fiscally disciplined, initially adopting the Conservatives’ fiscal rules to reduce debt in the medium term, with a focus on growth to boost GDP. There may be a need for the new government to borrow for some of their plans, however markets may be more favourable to them than to the Tories, given the expected increased stability of the government remaining intact.
The expected win has been welcomed by markets, with the more domestically focused FTSE 250 increasing by +0.9% over the day on Friday. The broader FTSE All Share index rounded off the week rising by +0.8%. Government borrowing costs did not move much on Friday after the results, with 10-year gilt yields slightly dropping from 4.18% to 4.14%. Early gains from the election result were seen in housebuilding stocks, as it is expected that Labour will use their strong political capital in their first few days in power to announce planning reforms. The first true test for the new Chancellor, Rachel Reeves, will be her first budget, which will be presented in early autumn. This will show markets where her commitments lie, whether there will be an increase in taxes not mentioned in the manifesto, and if there are plans for further government borrowing or public sector cuts.
France’s first round of parliamentary elections concluded with Marine Le Pen’s right-wing party, Rassemblement National (RN), declaring victory. This left the country’s left-wing and centrist parties rallying together to try to prevent RN from gaining power by withdrawing candidates to favour those more likely to succeed against their RN opponents in the second round of voting. Markets reacted positively to these moves, with the MSCI Europe ex UK index returning +0.8% over the week, in GBP terms. The tactic appears to have worked, although the situation has left no single party with a majority, resulting in a hung parliament. This result is expected to cause a period of uncertainty.
US stocks continued their positive streak, with the S&P 500 finishing the week up +0.7%, in GBP terms. On Friday, data showed that the US labour market was beginning to show signs of cooling. The unemployment rate rose to 4.1% in June, surprising market expectations which had forecast the rate to remain unchanged from the month before at 4%. The Federal Reserve (the Fed) will be monitoring these numbers closely. As inflation slows down and unemployment begins to rise, these trends pave the way for the Fed to begin cutting rates.
Japan’s corporate governance reforms are benefiting Japanese companies, as the Topix, a broad-based Japanese index, hit a record high on Thursday. The index peaked at 2898.47, finishing the week up +1.3%, in GBP terms. Additionally, investors are betting on the artificial intelligence boom and the benefits it may bring to high-end Japanese manufacturers.
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