Closing post
Time for a recap:
A Labour election victory will be a “net positive” for financial markets, strategists at the US bank JP Morgan have said, in an analysis that underlines the appeal of Keir Starmer’s “centrist platform” to the City of London.
A majority for Labour would benefit banks, builders and supermarkets, analysts led by JP Morgan’s head of global equity strategy, Mislav Matejka, wrote in a note to clients published on Monday. The US investment bank said Labour’s policies would be “modestly pro-growth, but crucially with a likely cautious fiscal approach”.
“We believe the market impact will be net positive,” they wrote, saying banks and homebuilders were among the sectors that would benefit.
The JP Morgan team explained:
“The current Labour party is occupying a centrist platform, and the perception of policy paralysis is set to move behind us.
“Labour agenda is modestly pro-growth, but crucially with a likely cautious fiscal approach. Our economists believe that, given the lack of fiscal space, Labour will likely focus on supply-side reforms to help improve economic growth.”
More than half of the 268 respondents to a Bloomberg News poll published on Monday of readers and users of its financial markets terminal said a Labour win would be the best result for the pound.
Analysts at MUFG, a Japanese investment bank, separately last week said that a landslide victory for Labour would be “most positive for the pound” because it would end political instability, raise expectations of higher government spending, and potentially help usher in a more constructive relationship between the UK and EU after Brexit.
Here’s the full story:
European financial markets have been rocked by yesteday’s election results, and President Emmanuel Macron’s surprise decision to call snap parliamentary elections in France.
The pound hit a 22-month high against the euro on Monday, reaching €1.1839, for the first time since August 2022.
Macron’s shock move also hit stocks in Paris, where the CAC 40 index fell over 2% at one stage. Germany’s DAX was is 0.7% in afternoon trading, after German chancellor Olaf Scholz suffered losses in the EU elections.
French bond prices also weakened, which widened the gap between Paris and Berlin’s borrowing costs. France’s 10-year bond yield (the interest rate on the bond) jumped to 3.22%, the highest since last November, up from 3.115% on Friday night.
And in other news…
ABN AMRO Global Insight say there are three potential scenarios how the French elections could play out.
Marine Le Pen’s National Rally party (RN) gains a majority at the parliament: This could lead to a so-called cohabitation for the remaining three years. This refers to a situation where the president’s political party and the Prime Minister’s party are different. In this scenario, the President would be forced to nominate a Prime Minister from the RN.
This would clearly be the most risky scenario for the French debt market as it would negatively impact the country’s fiscal outlook. However, for this to happen the RN would need to substantially increase its number of seats as it currently holds 89 seats in the parliament against 245 seats for the government in place. In our view, it will be difficult for the RN party to be able to close the gap to this extent. Furthermore, the risk of seeing the far-right party leading the government might push traditional parties like the PS (left-wing party) or the LR (right-wing) party to form a coalition to keep the RN party out of the government.Reunification of the left-wing NUPES coalition which was established during the past election composed of the Socialist (PS), the Greens (Les Verts), and far-left party (La France Insoumise). Last time, the NUPES coalition managed to obtain 131 seats (second biggest political force in the parliament after Macron’s party). If this coalition were to gain a majority, then Macron would need to nominate a prime minister from this coalition instead. However, we deem this scenario unlikely given the recent political backlash between the socialist party (PS) and Melenchon’s party (La France Insoumise), particularly following the controversial reactions to the Gaza conflict from the LFI party. Therefore, there is significant uncertainty on whether a coalition could be formed again. The parties are currently in discussion on the possibility to re-form this coalition. An update on this should follow in the upcoming days.
Last, we think there is still a significant chance for Macron’s party to retain its (relative) majority at the parliament. This scenario is in our view the most likely outcome at the moment, as despite the EU election results, this is usually not representative of the likely legislative election outcome. This would be the most market-friendly scenario as the current government would remain in place and continue with its economic and fiscal plan, which are more in line with the EU’s fiscal rules. However, it is likely that Macron’s party will lose seats compared to two years ago.
