Financial markets reacted to the early evidence of a record-breaking win for Labour in the general election, with a respected exit poll by Ipsos estimating a 170-seat majority for Sir Keir Starmer’s party. This figure was in line with predictions reported in pre-election polling.
Voting closed at 10pm, a time when UK financial markets are typically closed. However, there is an indicator on how investors are receiving the exit poll number. The pound, which is traded in the Asia-Pacific region during this time, initially remained steady against its main competitors such as the dollar and euro. Market analysts attributed this to the fact that a big win for Labour was widely expected and therefore already “priced in”.
Despite this, the pound did see some gains against the US currency, trading at $1.27, though analysts noted that this was mostly due to a weakening dollar rather than an increase in support for the pound. The pound also made up ground against the euro, trading at €1.18 after the exit poll was published.
Michael Metcalfe, head of macro strategy at State Street Global Markets, commented on the current stance of institutional investors towards the UK election. “Having been very negative on sterling for a long time, institutional investors are actually going into this election quite neutral,” he said. Metcalfe explained that this was due to rising political risk in other countries such as France and the United States. “Oddly, the UK has ended up with a neutral position in the middle,” he added. “Also, I don’t think at any point has the result of the election been in doubt.”
In terms of market performance, both the FTSE 100 and domestically-focused FTSE 250 ended Thursday’s trading in positive territory, up by 0.9% and 0.3% respectively – in line with other European market performances. Following the release of the exit poll, trading platform IG saw the FTSE 100 opening Friday’s session 0.4% higher. The implied figure is expected to shift until 8am when the opening bell is rung.
Dan Coatsworth, investment analyst at AJ Bell, shared his thoughts on the potential impact of a Labour victory on the stock market. “The UK stock market barely moved the last time the country switched from a Conservative to Labour government and the same might happen if Keir Starmer’s party is declared victorious,” he wrote. “Investors have already factored in the impact of a Labour win, thanks to the polls predicting a landslide victory for the party throughout the six-week campaign.”
Coatsworth also noted that markets have taken a relatively calm approach to the prospect of a Labour government, given the party’s promises not to raise taxes and its efforts to improve its relationship with the City. He added, “It would take a significant surprise to trigger noticeable volatility in the markets.”
The election was called by Rishi Sunak on May 22nd, and since then, the pound has only seen a marginal increase against the US dollar. This is largely due to strong support for the dollar, stemming from the delay in a US central bank interest rate cut. The reaction of London-based currency trading, along with the bond and stock markets, will provide a clearer picture of the market’s response.
While Labour under Jeremy Corbyn in 2019 was seen as negative for the economy by the City, under Sir Keir’s leadership, the party has shifted towards more traditional Tory territory. Labour has promised to focus on economic growth, improve the country’s relationship with the EU, and provide a clear policy path for businesses. The party has capitalized on investors’ frustrations with the previous parliament, which saw several own goals, including the fallout from the Truss mini-budget.
Should Labour win and Rachel Reeves become the country’s first female chancellor, she is likely to have a short honeymoon period. Stretched public finances, primarily due to COVID pandemic support and aid for energy bills following Russia’s invasion of Ukraine, will limit Labour’s ability to spend. This is in line with the party’s commitment not to raise mainstream taxes. However, investors and business groups can expect a flood of demands for available resources ahead of the first budget of the new parliament, expected in the autumn.
