Has the market fully priced in a UK Labour victory?

Sterling was on the rise on Friday following news of the Labour Party’s decisive victory in the polls. Traders will now be focusing on Labour’s economic policies as well as the next moves from the Bank of England now that the election campaign is over.

There was only limited reaction from the main UK stock market indexes in the wake of the result, reflecting the fact that many traders believed the polls and saw the Labour landslide coming. Blue chip homebuilders all saw early gains as the UK housing sector is expected to be an early beneficiary of the win.

The Labour win was well priced in and did not look too scary for the markets.

Sterling looks stronger on back of election win

Near term, anticipated rate cuts by the Bank of England are expected to play a key role in shaping the trajectory of the pound and gilt yields as we move into the high summer months. Premiums for UK gilts over the much-battered German bund market, which have been stable so far this year, could decline now that we see more clarity in the UK’s political leadership.

With anticipated political turbulence in France and the US in the second half of the year, expected more volatility from the USD market. For the UK, a lot will depend now on Labour’s first 100 days in office, including an anticipated budget in mid-September.

Analysts are optimistic about the course of the pound against the euro in the near term, as France goes to the polls again this weekend. Starmer’s arrival should inject an element of confidence back into GBP assets and we could see more buying of GBP in the next few days.

First hundred days will be crucial for Labour and the markets

Labour has campaigned on a pledge NOT to raise income tax, national insurance or VAT despite their significant spending plans. This leaves the new government with only around GBP 20bn in terms of fiscal headroom against current fiscal rules. Analysts remain sceptical about the government’s ability to achieve a 2.5% GDP target. If Keir Starmer and his team fail to achieve this, it could require more fiscal tightening.

“The question is now – just how bold does PM Starmer go,” asked Neil Wilson, Chief Market Analyst at Finalto. “Is it a case of ‘steady as she goes’ in terms of economic policy so as not to frighten the horses, and face pressure later from within its own ranks to borrow lots more; or go big and bold early on in the first 100 days? Fair to say we get the usual kitchen sink job from an incoming chancellor by blaming it all on the last guy.”

Investors buying gold ahead of anticipated CGT rise

The election has prompted more buying of gold going into the vote. The Pure Gold Company reported a 43% increase in Brits buying physical gold coins and bars over the last seven days. Many are selling other assets like art, cars and even houses to buy gold in anticipation of a rise in capital gains tax. UK gold coins minted by the Royal Mint are both CGT and VAT tax free (depending on individual circumstances).

“The decisive Labour victory provides stability for the UK political and economic outlook, and the pound has already strengthened a little in the aftermath, which makes dollar-denominated gold cheaper,” said Josh Saul, CEO of The Pure Gold Company. “We’ve had some property developer clients choose to sell property now, avoid an increase in CGT, take advantage of a more favourable gold price and enjoy the tax benefits of holding gold.”

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