The FTSE 100 index opened higher as the British pound strengthened against the US dollar and euro today after Labor secured a landslide victory in the general election.
Sir Keir Starmer will become Britain’s new Labor prime minister after former prime minister Liz Truss and 11 serving cabinet members lost their jobs following the Conservative defeat.
And the FTSE 100 opened up 0.4 per cent or 33 points at 8,275 early this morning after posting its best day in almost two months in yesterday’s session.
Meanwhile, the pound held firm, rising 0.1 percent to $1.278 – its highest level since mid-June – following a huge Labor victory. The pound also gained 0.01 percent to €1.180.
The pound was largely steady in overnight trading after the results signaled the pre-election polls, with a large Labor majority already priced into financial markets.
Housebuilders led the way on the FTSE 100 today as Labour’s landslide victory was seen as a boost to the sector, amid hopes that planning red tape will be cut to pave the way for more development and housing supply.
Victoria Scholar, head of investments at the interactive investor, said: “The relaxed mood in financial markets reflects the fact that Labour’s landslide victory had long been predicted by polls and was therefore already baked into market prices.
“In stark contrast to Liz Truss’ ill-fated 2022 mini-budget, which sent bonds and sterling crashing, today’s lack of market volatility and muted price action suggest investors and traders see the latest election result as a democratic vote for a new political era of stability and calm .”
Experts said market attention would now turn to the state opening of parliament and the royal speech on July 17 and the politics that could follow, as well as the prospect of a possible interest rate cut in August.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “The new administration may have a honeymoon period, but then difficult decisions will have to be made in office.
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“The size of the victory and the increase in support for minor parties and independents will leave Labor MPs concerned about the safety of their seats at the next election.
“They know they have to please voters, but they are likely to be held back by a commitment to fiscal responsibility and spending restraint.
“The priority will be to keep markets undisturbed in the first days, weeks and months of the new administration and not over-promise on spending.”
Analysts now hope the landslide election result could bring a sense of stability to investors who expect it could end years of market volatility.
Ben Ritchie, director of developed markets equities at Abrdn, said: “An emphatic win provides the kind of clarity and stability equity markets need in an increasingly volatile world.
“If the new government gets it right, businesses with significant exposure to the UK economy should be the likely winners – a hit especially for companies in the FTSE 250 and FTSE Small Cap.”
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Since Rishi Sunak called the election at the end of May, Sterling has rallied slightly, earlier than expected. Against the dollar, it is the strongest major currency this year with a gain of 0.3 percent.
On a trade-weighted basis, the pound is now back to where it was in 2016 at the time of the Brexit vote, reflecting traders’ and investors’ belief that a period of intense market volatility under the Tories may be coming to an end.
Kenneth Broux, head of corporate research for FX and rates at Societe Generale, said: “We know Labor is going to win so not much changes and it’s not a game changer for the pound.
“Now we want to know what Labour’s plans are. Investors have been in sterling for a long time and sentiment has been good and the results will not change that.”
In line with this sense of calm ahead of the election, the premium that investors demand for the extra risk of holding government bonds instead of highly rated German 10-year bonds has remained steady around 160 basis points this year.
That’s a far cry from the 230 basis points seen during the 2022 minibudget crisis.
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Yields on 10-year UK government bonds have risen to around 4.2 percent this year as investors sold debt on their assumption that UK interest rates will fall longer than many had previously expected.
The Bank of England is widely expected to cut interest rates at its August or September meeting.
Analysts added that investors are likely to look quickly beyond this week’s election results and monetary policy.
Fiona Cincotta, senior marketing strategist at City Index, said: “What will be really interesting is that there really isn’t that much room for dramatic changes in fiscal policy.
“So I don’t think there’s anything that’s going to move the market massively in terms of this election until the autumn announcement, so the focus will shift, probably very quickly, back to the Bank of England. ‘
In Asia, Japan’s Nikkei and the broader Topix hit record highs overnight, as did Taiwan’s benchmark, before retreating slightly.
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It comes as outgoing Prime Minister Sunak said he took responsibility for election attacks on his party, which suffered its worst result in history.
At a victory rally in London, Sir Keir said the country could now “get its future back”. He told jubilant activists: “We did it” and added: “Change starts now.”
It is a spectacular turnaround from 2019, when Boris Johnson won an 80-strong Conservative majority and Labor suffered its worst result since 1935.
Labor has passed 400 seats in the House of Commons, with the Conservatives set to fall well below their previous low of 156 in 1906.
The result is likely to trigger a new round of infighting within the Conservative party as MPs seek to replace Mr Sunak, who is expected to step down after the defeat.