How the UK and French Elections Moved the Financial Markets

While the Labour Party swept the UK elections, the situation in France was far from decisive. The snap general elections left the country with no clear winner only a fortnight before France hosts the Olympics.

Squabbling among the three coalitions that won the most seats failed to result in a parliamentary majority, with warnings being issued that it could take months for a solution to be found. However, the market reaction to both results was tepid at best. Let’s take a look.

How the UK Labour Win Affected the Financial Markets

The Labour Party win was largely expected and priced into the markets. A Labour government promises stability after the prolonged period of volatility in the UK. This led to positive sentiment, with the pound sterling and stock markets rising on news of Sir Keir Starmer’s big win. The markets also expect the worst to be over for the UK economy, with the UK GDP rising 0.7% in the first quarter, beating the Office of National Statistics’ expectation of 0.6%.

The GBP, the strongest performing currency in 2024, rose 0.13% against the USD and 0.01% against the EUR after the Labour Party win. The GBP/USD is up 1.67% over the past month, while the GBPEUR is up 0.29%. However, sentiment is now turning bearish, as can be seen in the Acuity AssetIQ widget.

In the stock market, domestic-focused mid-cap stocks were the biggest winners following the news of the Labour victory. The FTSE 100 was up 0.4% at market open, outpaced by the FTSE 250, which gained 1.8%. The FTSE 100 recorded its best session in nearly two months while the FTSE 250 hit its highest since April 2022. European stocks responded positively too, with the STOXX 600 up 0.4%.

The FTSE 100 has continued its bullish trend, rising 1.36% over the one month to July 15, 2024. Acuity’s AssetIQ widget confirms this bullish opportunity in the index.

Sectors that will most benefit from the new government include defence and infrastructure, given the Labour Party’s intention to spend 2.5% of the UK GDP on defence and £24 billion on green initiatives. However, the energy sector could remain volatile till there is clarity on tax changes.

The construction materials and home-building sectors will also benefit from home-building targets being reinstated by the new government and investments in local planning departments.

Impact of the French Election Results on the Markets

Meanwhile, in France, the stock market moved up after initial losses, while the risk premium narrowed between French and German bonds as the markets digested the news of the hung parliament and potentially prolonged negotiations to form a government.

The French markets remained volatile while traders processed an absent far-right victory that could have driven borrowing and spending and failure of the left, which is opposed to President Macron’s pro-market stance, to gain a clear win.

The CAC40 (FR40) rose 0.4%, reversing its earlier losses, although the index remained 4% below its levels before the election was called on June 9. French banks, on the other hand, were hit hard by a sell-off that preceded the election, driven by concerns regarding the impact of higher borrowing on French government debt and the potential for "windfall taxes." Opportunity on the CAC40 remains very bullish, according to Acuity’s AssetIQ widget, despite bearish news sentiment.

In the forex markets, the EUR stabilised after an initial decline against the pound sterling and the US dollar. The markets are neutral on the EUR/USD, as seen in the Acuity AssetIQ widget, despite the euro having risen 1.40% in the one month to July 15, 2024.

Political instability and a shift of control to a more spending-focussed left could put some pressure on the euro and lead to higher spreads on French government bonds. However, without a clear winner, the fear of radical policy changes has declined significantly.

What Does This Mean for Traders?

Despite the major changes in both the UK and France, the market response was fairly indifferent. Initial gains and losses did not last very long, with the markets returning to their previous trends. While French stocks and the euro might remain vulnerable to volatility during the period of uncertainty before a government is formed, the impact will be limited by the fact that neither extreme wing won an absolute majority.

On the other hand, the GBP is being supported by the Bank of England’s patient stance and a recovery in cyclical assets, which could continue till the BoE starts cutting interest rates. The UK central bank is more likely to consider interest rate cuts in September, rather than August.

Meanwhile, the Labour government’s focus on economic stability and fiscal prudence could raise business and household confidence, which could, in turn, drive a more sustained domestic activity recovery. Greater confidence in an economic recovery will support UK equities, narrowing the deep discount that these stocks have been trading at to their US counterparts.

Next up is the US presidential elections and all traders will be following the November 5^th results closely.