Wednesday, June 12, 2024

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

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European elections rattle markets: a quick recap

After a couple of hours trading in Europe, here’s a recap of the main moves.

  • The Paris stock market has dropped deeply into the red, after Emmanual Macron stunned France by calling snap parliamentary elections last night. The CAC 40 is down 2% right now, a three-month low, with bank stocks falling over 4%.

    Macron called the snap poll after his centrist alliance was trounced by Marine Le Pen’s far-right movement in the European parliamentary vote.

Antonio Ernesto Di Giacomo, market analyst at xs.com, explains why investors are concerned:

Macron’s decision to call for early elections adds a new layer of uncertainty in France, a crucial country within the eurozone. If Marine Le Pen’s far-right party wins a parliamentary majority, Macron’s ability to govern and manage national affairs could be seriously constrained.

This prospect is causing significant concern among investors, as prolonged instability in the eurozone’s second-largest economy could have considerable repercussions in financial markets.

Charalampos Pissouros, senior investment analyst at XM, says:

Although socialist, liberal and center parties are set to retain a majority in the European Parliament, the surge in Eurosceptic nationalists is likely to make it more difficult for lawmakers to agree and push through reforms and policies that give the Union more power.

Combined with the prospect of a far-right victory in France, this could keep the euro pressured for a while longer.

Bill Blain, market strategist at Wind Shift Capital, said today:

There is nothing like the prospect of increasing European political instability, rising distrust of the EU and its agencies (including the ECB), and internal dissent to rile bond markets thinking about European Sovereign Bond markets.

The concept of a united monetary and fiscal union in Europe moves further away.

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Key events

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.

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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.

The European election results aren’t the only factor weighing on markets today.

Investors are also anxious that the US central bank, the Federal Reserve, may not cut US interest rates as soon as hoped.

Early rate cuts look extremely unlikely after America’s economy added 272,000 new jobs last month, much more than expected.

Fiona Cincotta, senior financial market analyst at City Index, explains:

The DAX is falling but is holding up better than some of its European peers, such as the French CaC, as investors digest the results from European parliamentary elections.

Eurosceptic far-right parties performed well, and Chancellor Scholz’s Social Democrats fell to third place behind the far-right Alternative for Germany.

Meanwhile, in France, President Emmanuel Macron surprised the markets by calling for snap elections after Marine Le Pen’s hard-right National Rally party won more than 30% of the votes. French banks were bearing the brunt of the news, with BNP and Société Générale among the largest decliners.

Stocks suffered a double blow as election worries combined with concerns that the Federal Reserve may not cut interest rates anytime soon.

The hotter the following stronger-than-expected U.S. jobs report on Friday has seen the market rein in Federal Reserve rate cut expectations. Meanwhile, in Europe, the ECB cut interest rates last week but refused to commit to further rate cuts and upwardly revised its inflation forecasts.

Over the weekend, ECB President Robert Holzman voiced caution on further rate cuts. The head of the Austrian central bank said the bank would be looking to avoid putting itself in a corner and did not want to comment on the future path for rate cuts.

And here’s why JP Morgan thinks housebuilders would benefit from a Labour government:

Both parties look to focus on increasing the supply of affordable housing. Labour in particular have advocated for the reintroduction of the target to build 300,000 homes a year.

They intend to cut red tape to expedite the approval process. for new-builds (including reform to “Not in my backyard” policy). This would be a positive for home builders, especially the ones geared towards the lower end of the housing market. Labour has also undertaken to extend the current mortgage guarantee scheme which helps homebuyers accessmortgages with low deposits.

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JP Morgan also suggest that an environment of greater political and policy stability after the election could help stabilize the outflows from UK assets.

They point out that British shares have lagged global rivals since the Brexit vote, saying:

UK equities currently trade at a 38% discount versus MSCI World, much larger than typical historically. On the eve of the Brexit referendum in June 2016 they traded at par with the World.

Photograph: JP Morgan

And on the winners and losers of a Labour election victory, they explains:

At sector level, we see a Labour win as a positive outcome for Banks, Homebuilders and Food Retail, while Energy and Transportation are likely to trade negatively as a result of Labour’s policies.

The Utility sector is likely to benefit from the increased spending in “clean” technologies as Labour works towards achieving its net-zero target; however, Water sector could be at risk of increased regulation.

JP Morgan’s research report shows that since 1970 the UK stock market has rallied by 1%, on average, in the month after a Conservative election win, but dipped by 2% in the month after Labour has triumphed.

They say:

Historically, short term market reaction to a Labour victory in UK elections has been somewhat weaker than for Conservatives.

However, we think that this time a Labour win will likely be seen as a positive for the UK markets. The current Labour party has a much more centrist policy agenda.

[interestingly, though, UK markets have fallen by 5% on average after six months of a Conservative government, but gained 8% after half a year of a Labour government].

Photograph: JP Morgan

European elections rattle markets: a quick recap

After a couple of hours trading in Europe, here’s a recap of the main moves.

  • The Paris stock market has dropped deeply into the red, after Emmanual Macron stunned France by calling snap parliamentary elections last night. The CAC 40 is down 2% right now, a three-month low, with bank stocks falling over 4%.

    Macron called the snap poll after his centrist alliance was trounced by Marine Le Pen’s far-right movement in the European parliamentary vote.

Antonio Ernesto Di Giacomo, market analyst at xs.com, explains why investors are concerned:

Macron’s decision to call for early elections adds a new layer of uncertainty in France, a crucial country within the eurozone. If Marine Le Pen’s far-right party wins a parliamentary majority, Macron’s ability to govern and manage national affairs could be seriously constrained.

This prospect is causing significant concern among investors, as prolonged instability in the eurozone’s second-largest economy could have considerable repercussions in financial markets.

Charalampos Pissouros, senior investment analyst at XM, says:

Although socialist, liberal and center parties are set to retain a majority in the European Parliament, the surge in Eurosceptic nationalists is likely to make it more difficult for lawmakers to agree and push through reforms and policies that give the Union more power.

Combined with the prospect of a far-right victory in France, this could keep the euro pressured for a while longer.

Bill Blain, market strategist at Wind Shift Capital, said today:

There is nothing like the prospect of increasing European political instability, rising distrust of the EU and its agencies (including the ECB), and internal dissent to rile bond markets thinking about European Sovereign Bond markets.

The concept of a united monetary and fiscal union in Europe moves further away.

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Here’s Moody’s Ratings analyst Ruosha Li on the impact of the European elections:

“A thinner margin for defections from the centrist coalition could make it harder to get a new commission confirmed and some legislation across the line over the next five years.

But parliament is unlikely to impede progress on key priorities like security and competitiveness, including a capital markets union.”

The selloff in French government bond selloff is continuing, pushing up the yield (or interest rate) on France’s 10-year bonds.

Political shock following Emmanuel Macron’s decision to call snap parliamentary elections has pushed up 10-year French government bond yields to around 3.2%, from 3.115% on Friday night. That’s the highest since last November.

FRANCE’S 10-YEAR GOVERNMENT BOND YIELDS HIT HIGHEST SINCE NOVEMBER AT 3.2%, LAST UP 9 BPS

— First Squawk (@FirstSquawk) June 10, 2024

Lizzy Galbraith, political economist at abrdn, says:

“Following poor European parliamentary elections, in which his Renaissance party secured 15.2% of the vote, well behind Marine le Pen’s Rassemblement National (RN) which won 31.5%, French President Macron has announced snap parliamentary elections on 30 June and 7 July.

Palriamentary elections will not affect Macron’s position as president, but leave him vulnerable to having to govern with opposition parties in control of parliament, further entrenching the difficulties he has had in passing legislation under his current term.

Macron will hope to use any concerns among French voters about the strength of RN to unify opposition votes and strengthen his voter base, but with his personal popularity low, he faces an uphill battle.

Unlike the proportional system used in the European parliamentary elections, French parliamentary elections use first past the post, so while RN appears on course for major gains, they may not be as substantial as this weekend’s result suggests.”

JP Morgan: Labour win would be positive for markets

Analysts at JP Morgan say a Labour win in the UK general election would be a positive development for the financial markets.

In an Equity Strategy note published this morning, they explain that Labour is “occupying a centrist platform”, saying:

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.

Labour have also sought to reassure businesses by ruling out corporation tax increases. In terms of key policies, Labour’s Green Prosperity Plan will focus on the country’s climate transition, while both parties are focused on affordable housing.

Broadly, they favour the domestically focused FTSE 250 share index, of medium-sized companies listed in London, over the blue-chip FTSE 100 which has more of an international focus.

JP Morgan predict that the banking sector, housebuilders and food retailers would benefit.

They explain:

  • Banks: political and policy stability from a Labour party win would be supportive for the sector, particularly absent any risks around Corporation tax/Banking surcharge, as was the case during the 2019 elections;

  • Homebuilders: housing will likely be core to the upcoming elections, with the focus on affordable housing, unlocking land for development and reforming the planning system; and

  • Food Retail: Labour party support for policies like incentivizing private sector investment and continued focus on cost of living crisis.

But, JP Morgan adds that a Labour party win would be less positive for Transportation, as “nationalisation of the railways would weigh on the sector”; Energy, as Labour plan to increase and extend the Energy Profits Levy.

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The big issue for investors to think about today are the consequences and implications of the far right’s gains across Europe at the EU elections, says Bill Blain, market strategist at Wind Shift Capital.

There is nothing like the prospect of increasing European political instability, rising distrust of the EU and its agencies (including the ECB), and internal dissent to rile bond markets thinking about European Sovereign Bond markets.

The concept of a united monetary and fiscal union in Europe moves further away.

French assets not reacting well to snap elections:
10y OAT +8bps
French banks (Soc Gen, BNP, Credit Agricole) -5%

— Joumanna Nasr Bercetche 🇱🇧 (@JoumannaTV) June 10, 2024

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Over three-quarters of UK stocks are in the red this morning.

The FTSE 100 share index has dipped by 27 points, or 0.33%, to its lowest level since the end of May.

About 78 of the blue-chip companies on the index are lower, led by gambling firm Entain (-2.2%), packaging group DS Smith (-1.9%) and banks NatWest (-1.8%) and Lloyds (-1.8%).

AJ Bell investment director Russ Mould says:

“Political turmoil in Europe saw the FTSE 100 start the week on the back foot with only a handful of names on the index trading in positive territory.

“An unexpectedly strong showing for far-right parties in European elections in France prompted President Emmanuel Macron to call a snap parliamentary election to be held within the next 30 days. This injects a big dose of the uncertainty which markets hate – with the euro dropping sharply in response to the developments.

“Financial stocks were among the worst performers in London as investors digested the news. Also affecting sentiment were Friday’s better-than-expected US jobs numbers which push back against the narrative that rate cuts are imminent.

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