SOME CALM RETURNS TO EUROPEAN MARKETS AS LABOUR MAINTAINS HEALTHY LEAD IN UK ELECTIONS

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Data Sourced from FE Analytics, and Bloomberg Finance LP

SOME CALM RETURNS TO EUROPEAN MARKETS AS LABOUR MAINTAINS HEALTHY LEAD IN UK ELECTIONS

This week European markets had a chance to stabilise following the disruption caused by the European parliamentary elections. The outlook for
Emmanuel Macron hasn’t improved much. In fact, the emergence of a left wing bloc of parties who are uniting in opposition to Marine Le Pen’s
RN party has increased the potential for Macron’s centrists to lose seats. However, markets appear more comfortable with RN’s attempts to water
down some of their populist policies, and investors are assuming that the closer they get to power the more moderate RN will have to become.
Meanwhile, the UK election has brought few surprises. Rishi Sunak’s campaign has failed to close the gap on Labour as stronger polling for Reform
shows the Conservatives losing support. Labour’s priorities are becoming a little clearer, but the promise not to reform tax is a comforting message for investors. Away from politics, the return of inflation to its 2% target has revived hopes for a rate cut in August. However, rising energy
costs mean inflation is expected to pick up later this year, so the outlook for employment and consumer spending will be equally important.

UK: CPI FALLS BACK TO TARGET AS BANK OF ENGLAND HOLDS RATES

The Bank of England left interest rates unchanged despite inflation falling to 2%. High food prices have been one of the major drivers of inflation but the cost of food is now falling and this helped the Consumer Prices Index fall back to target in May. Inflation was expected to fall so the Bank of England’s decision to keep rates on hold was widely expected. However, UK gilts made gains as markets see a greater chance of a cut at the next meeting in August.

US Treasuries also gained after disappointing retail sales cast more doubt on the strength of US consumer demand. Despite several members of the Federal Reserve warning that any rate cuts this year will be minimal, investors appear more bullish about the potential for cuts. The attitude towards rate cuts remains balanced as the Swiss National Bank cut rates for the second time in a row despite inflation remaining low. However, the Norwegian central bank warned that it will keep rates high until at least the end of the year.

EUROPE: MARKETS STABILISE AS POLLS PREDICT BIG LOSS FOR MACRON

European financial markets have calmed down after the turmoil caused by last week’s elections. European government bond yields have stabilised as French, Italian and Spanish bonds stopped falling. Sentiment was helped by the French government raising 10.5bn euros in a successful government bond auction. Equity markets have been more volatile but most major Eurozone markets have recovered some of last week’s losses. The French CAC 40 index led the decline last week but it is on track for a small gain this week despite the uncertainty caused by the snap general election. Current polls show president Emmanuel Macron’s Renaissance party is set to lose a significant number of seats as far-left and far-right parties appear on track for big gains.

Meanwhile South African equities have recovered from the sell-off caused by the ANC losing its majority in the recent election. Cyril Ramaphosa has returned as president at the head of a business-friendly coalition government and this also helped the rand to rebound.

EQUITIES:MARKETS LOOK FOR POLICY IMPACT AS LABOUR SET FOR BIG WIN

With less that two weeks until the general election, the Labour party holds a big lead in the opinion polls and is on track for a significant majority. The prospect of a government led by Keir Starmer is one markets appear comfortable with and Labour’s campaign is based on avoiding big spending commitments or tax changes. However, some policies are becoming clearer as Labour looks for measures to boost economic growth.

Labour has identified planning reform as a way of boosting the number of houses built each year and of making it easier for renewable energy projects to gain approval. It is planning to create a new government-owned energy company to reduce household energy bills and also plans to increase the windfall tax on energy companies. Shares in UK builders have been gaining in recent weeks, while energy firms have fallen back. However, other factors like falling mortgage rates and oil and gas prices are also affecting shares prices.

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