Markets don’t like surprises. And the election results, while explosive, are not a surprise – or at least the winner isn’t. Labour has secured a substantial majority, as markets had been expecting the party to do from the start of the election. No surprise this morning means no immediate jitters, as the result was already priced in. Sterling is slightly up, by 0.1 per cent, hovering around $1.28. The FTSE 100 is up 0.4 per cent since markets opened this morning.
Most notably, housebuilding stocks are on the up. The strong speculation that Labour will use its first days in power to announce a planning overhaul has given the market quiet confidence that more homes might get built. Shares for a range of housebuilding companies and developers – including Barratt Developments, Vistry and Taylor Wimpey, and Bellway – are all up by about 2 per cent.
Crucially, there seems to be no immediate nervousness about Labour’s fiscal strategy – helped immensely by the party’s announcement that it would stick to Tory fiscal rules to get debt falling in the medium term, and the difficult choice it made ahead of the election to scale back spending promises, especially around green investment. Ten-year gilts are slightly down this morning, in line with the trajectory of neighbouring countries, hours ahead of the formal transfer of power.
Quiet is what Labour wanted on the market front once the results were announced. For the new government, this is the ideal outcome.
But it’s not one that’s guaranteed to stick. Keeping the markets onside is going to require serious effort from the new chancellor, who we can expect to be Rachel Reeves by this afternoon. There has already been some speculation that Labour might have more scope to borrow than the Tories did, possibly because of the increased security that the government will stay in tact.
When I asked the Director of the Institute for Fiscal Studies about this ahead of the election, his answer was mixed. ‘Supposing Rachel Reeves were to say in the first budget having spoken to stakeholders, that “rather than getting debt falling in five years’ time, I'm actually happy with debt rising by, let’s say, five percentage points of national income”. What might happen? Would the markets go bonkers? I don’t think so,’ he said. But he quickly added that it would be a risky move and that interest rates would probably tick up, at a time when they are expected to start to fall.
The first big real test won’t be until after the summer recess. That’s the earliest we’ll get Labour’s first fiscal event, as the party is implementing a rule that the Office for Budget Responsibility must give its assessment alongside it. But the immediate market reaction was the first hurdle, and Labour has jumped it comfortably.
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