MARKETS SHOULD EXPECT A PRAGMATIC APPROACH AS LABOUR SECURES A BIG GENERAL ELECTION VICTORY

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Data Sourced from FE Analytics, and Bloomberg Finance LP

MARKETS SHOULD EXPECT A PRAGMATIC APPROACH AS LABOUR SECURES A BIG GENERAL ELECTION VICTORY

This week brought an end to 14 years of Conservative government. A widely predicted result, the main drama revolved around how much they might lose by. A lot as it happened. While the results look seismic there is less change below the surface. The whims of a few thousand people in a few dozen constituencies is the difference between a landslide victory and getting sacked at 2am in the local leisure centre. The splintering of the right wing of the party put the boot in, boosting the final result, but the election looks less like a realignment than a final sigh of exasperation.

In the end chaos is rarely tolerated for long in British politics, with a long-established preference for dull competence probably the nation’s best quality. Although politicians can occasionally bring about big changes it is usually only by breaking something and making things worse. Actual improvements generally come incrementally through a focus on the boring details rather than bombastic tub-thumping. Britain’s problems are complex and likely expensive, and markets and voters should not expect anything more than steady and pragmatic reform.

UK: MARKETS CALM AS LABOUR SWEEPS TO POWER

The Labour party is set for a big majority in next parliament as the Conservatives didn’t managed to close the gap in the opinion polls over the short election campaign. The Labour party has maintained a big lead in the opinion polls for more than two years so financial markets have been unmoved by the prospect of a big Labour win. The Conservatives’ policies evolved to include more tax cuts and increased spending but Labour’s campaign was based on avoiding extra spending commitments.

European markets have been much more volatile as the rise of the French hard-right RN party has caused turmoil. European equities recovered some recent losses after the the first round of voting made it harder for RN to secure a majority in the French parliament. The other parties have adopted a strategy of uniting behind a single candidate to block RN from forming the next government. Most major European markets continued to rally though the week as softer economic data boosted the chances of interest rate cuts in the US.

RATES: ECB CAUTIOUS ABOUT FURTHER CUTS AS US JOBS MARKET SOFTENS

Weaker US economic data helped equity markets rise and US government bonds reverse some losses from the beginning of the week. Activity in the US services sector fell sharply last month as the ISM Services activity index fell to 48.8 from 53.8 in May. Employment, new orders and prices in the services sector also fell. Unemployment increased more than expected last month and fewer new jobs were created. This helped bonds rise slightly, despite Federal Reserve chair Jerome Powell warning that the bank needs more evidence that inflation will continue to slow before US rate can be cut.

Powell was speaking an annual conference organised by the European Central Bank and severe members of the ECB also warned about the need to see inflation come down decisively before rates can be cut. CPI inflation in the Eurozone fell to 2.5% in June, but core inflation was unchanged at 2.9%. This caused the dollar to fall slightly against the Euro and the pound and European government bonds declined.

OIL: PRICES RISE ON MIDDLE EAST TENSION AND EARLY HURRICANE SEASON

More fighting in the Middle East has driven up the oil price in recent weeks. The Israeli army has expanded its operations in Gaza, but hopes of a ceasefire remain. However, the escalating confrontation between Israel and militant group Hezbollah in southern Lebanon have raised concerns that the conflict may still widen. Brent crude has risen 11% this month to $86. The early start of the hurricane season in the Caribbean has also pushed up prices as Storm Beryl was upgraded to a category 5 severe storm earlier this week. Oil production in the Gulf of Mexico has been unaffected, but forecasters expect a more active hurricane season with potential for US production to be curtailed.

The price of copper has also risen, although it remains short of its recent peak. It hit $5.10 per pound before concerns about high inventories and weaker industrial production in China caused this to fall back. The price is now rising again on hopes that a US interest rate cut will boost global demand and news that China’s stockpiles are being run down.

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