Labour victory would be ‘positive for UK markets’, says JP Morgan; euro slides after European election results – as it happened

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.

1. 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.
   

2. 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.
   

3. 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.

Credit rating agency DBRS Morningstar has warned that the snap French legislative elections announced last night increase political uncertainty and present a risk to policy predictability.

They point out that they could lead to a change of government just before Paris hosts the Olympics.

There are also important fiscal events coming up, including 2024 new expenditure savings and 2025 budget preparation.

Mehdi Fadli, senior vice president in the Global Sovereign Ratings Group, says:

“In a strained geopolitical context, French snap elections bring heightened political uncertainty and the risk of less policy predictability to France.

“Elections now coincide with a time of significant importance for France’s fiscal trajectory.”

The State Bank of Pakistan has joined the growing roster of central banks cutting interest rates.

Pakistan’s central bank has cut rates for the first time in four years today, and by more than expected, as it lowered its benchmark rate by 150 basis points (1.5 percentage points) to 20.50%, from 22%.

The State Bank eased policy after Pakistan’s consumer inflation rate slowed to 11.8% in May, a 30-month low.

It says:

“The committee, on balance, viewed that it is now an appropriate time to reduce the policy rate.”

Fast-fashion pureplay PrettyLittleThing (PLT) is facing a customer backlash after becoming the latest retailer to introduce a returns fee for customers.

PLT is now charging £1.99 to return items in the UK, having previously offered free returns via couriers including Evri, Royal Mail and InPost.

The BBC reports that some shoppers have posted screenshots on social media showing their PLT apps being deleted from their phones, with many saying they would return fewer items if the brand’s sizing was more consistent. More here.

PLT is hardly the first retailer to drop free returns, though. Two years ago its parent company, Boohoo, began charging shoppers to return unwanted items.

Although next month’s UK election could boost asset prices, it also creates economic uncertainty that could dent confidence.

The 4 July poll is also likely to deter the Bank of England from lowering interest rates at its meeting later this month, explains Thomas Pugh, economist at audit, tax and consulting firm RSM UK:

The general election won’t derail economic outlook, but there is a chance that the uncertainty means confidence takes a temporary hit. When you combine this with sticky service inflation, then it is very unlikely that we will get an interest cut before August.

With markets pricing in just a 5% chance of a rate cut in June, the MPC has a good excuse to hold off until August, when we think the first cut will come. As economic headwinds continue to ease, the MPC will start to feel the heat this summer to make the first move

Elsewhere today, the average shelf life of a UK mortgage has nearly halved in the space of a month.

At the start of June, the typical mortgage was spending 15 days on the market before being pulled from sale, down from an average of 28 days at the start of May, according to data provider Moneyfacts.

June’s reading is the shortest average time period recorded since March, with offers being pulled as lenders reviewed their ranges, repricing some offers and withdrawing others.

Rachel Springall, finance expert at Moneyfacts, says:

“Consumers concerned about rising rates would be wise to seek advice from an independent broker to see if they can lock into a deal early, as some will let borrowers do this from three to six months in advance.

However, there may well be some borrowers sitting on the fence, hoping the market gets a base rate cut this year, but they could still grab a lower rate deal than if they were to sit on their SVR without fixing, such as with a tracker deal.

Those about to come off a five-year fixed mortgage will have to face the reality that rates are much higher now on an equivalent deal, 2.65% in fact, compared to June 2019, so consumers must ensure they can afford the higher repayments.”

The pound’s rally to a 22-month high against the euro this morning will be a boost to UK holidaymakers visiting the continent this summer (once they’ve got through the queues…).

At €1.1823 this morning, sterling is up 2.5% so far this year against the euro, meaning pound will go a little further at European gift shops, bars and restaurants.

It’s 6% stronger than in the aftermath of the 2022 mini-budget, when the pound fell and was only worth €1.11.

Matthew Ryan, head of market strategy at global financial services firm Ebury, says:

“The prospect for an overwhelming Labour victory at the General Election next month is actually buoying Sterling, which has broken out of its year long range against the euro.

Markets view a Labour majority as perhaps the most market-friendly outcome of the elections – a reflection of both the lingering damage done by Liz Truss’s ill-fated budget, a shift towards the political centre under Keir Starmer and the likelihood of a less contentious relationship with the European Union.

There are three tactical reasons why Emmanual Macron plumped for shock parliamentary elections after learning his centrist alliance had lagged far behind the far-right National Rally (RN) in the European parliamentary elections, says Philippe Ledent, senior economist at ING.

1. On the one hand, the short campaign ahead will force the other parties to clarify their positions. Remember that in the current parliament, no political group has a majority (neither the president’s party, the traditional parties, nor the RN). Until now, it has almost always been impossible to form stable coalitions on important reforms, forcing the government to go by force (using article 49.3 of the constitution, allowing it to pass laws without a vote in parliament unless parliament passes a no-confidence motion). The threat of a major RN parliamentary victory could move positions.
   

2. The president probably also wants to show that the vote in the European elections was a protest vote, giving the image of a stronger RN than is actually the case. Let’s not forget that, contrary to the European ones, the legislative elections are held in two rounds and abstention reached over 48.5% during yesterday’s vote. No doubt President Macron is counting on voter mobilisation and alliances between the two rounds to overturn yesterday’s results.
   

3. Assuming, however, that the RN manages to win an absolute majority (which would require it to win over 200 seats compared with its current representation), President Macron would be forced to co-habit with a government drawn from the RN. If anything, history has shown that this works against the governing party. As for the RN, unaccustomed to power, perhaps the president wants to demonstrate that the RN is not the solution, though this remains a gamble.