UK markets advance on foot of Labour’s election night sweep

Investors responded to Labour’s historic election victory by buying up UK stocks and pushing the pound to its longest winning streak in four years.

The FTSE 100 Index gained 0.4 per cent, with home builders leading the advance. The pound climbed for a seventh straight day, edging up 0.1 per cent to around $1.277. Ten-year UK bond yields dropped two basis points to 4.17 per cent.

The hope is that Keir Starmer’s centre-left platform ushers in a new era of calmer and more moderate British politics, and that the new government is unlikely to see a return to the fiscal turmoil that upended bond markets in 2022. With Labour securing a decisive majority in the House of Commons, Rishi Sunak conceded defeat and Starmer is set to become prime minister.

“After the political whipsawing of recent years, this result should provide investors with the certainty and stability they have been craving,” said Adam Montanaro, a fund manager at Montanaro Asset Management.

With British stocks near a record high and bond volatility having disappeared, the country’s financial markets are starting to look like a bastion of tranquillity, particularly at a time when the US and France are going through their own intense leadership battles that threaten policy upheaval.

“With political turmoil hitting other developed economies at the same time, this huge majority may present the UK to investors as somewhat of a political safe haven,” said Lindsay James, a strategist at Quilter Investors.

Relentless messaging on fiscal discipline in the UK has left investors confident that Starmer and his pick for chancellor Rachel Reeves will not do anything radical on spending or borrowing. Before the vote, Labour placed economic stability at the top of its manifesto and pledged to stick to tough spending rules.

The UK’s transformation in the mind of investors can be most clearly seen in the pound. The currency has been the best performer across the Group-of-10 this year, bolstered by higher interest rates and the prospect of a slow and shallow easing cycle from the Bank of England. A gauge of expected price swings on sterling over the coming month fell to 5.76 per cent this week, its lowest since May.

With “the UK’s macro balances and flow backdrop looking healthier and now a likely quiet period for politics, we remain constructive on sterling crosses,” Deutsche Bank AG strategists including Sanjay Raja wrote in a note to clients.

Rachel Reeves, an ex-Bank of England staffer now set to become the UK’s finance minister, has said that the administration would not raise three of the UK’s key taxes on wages and goods. Other promises included building more houses, creating a publicly-owned energy company and moving to “reset the relationship” with the EU – though Labour’s manifesto also ruled out a return to the single market or customs union.

Still, the incoming government is inheriting a sluggish and fragile economy. While inflation has fallen back to the Bank of England’s 2 per cent target, prices for services remain sticky. And a rebound from last year’s technical recession appears to be losing momentum, according to the most recent growth data. But expected interest-rate cuts by the BOE in the next few months give bond investors another reason to favour gilts. – Bloomberg