JP Morgan says that a Labour victory in the election would be a ‘net positive for markets’

In an analysis which highlights the appeal of Keir Starmer’s “centrist platform” to the City of London, strategists from the US bank JP Morgan said that a Labour victory would be a “net positive” for the financial markets.

In a Monday note, Mislav Matejka’s team of analysts, led by the head of global equity strategy at JP Morgan, Mislav Matejka wrote that a majority for Labor will benefit banks, supermarkets and builders. The US investment bank stated that Labour’s policies will be “modestly growth-friendly, but with a prudent fiscal approach”.

Analysts from MUFG, a Japanese bank, said separately that a landslide Labour victory would be “most beneficial for the pound”, because it would end the political instability and raise expectations for higher government spending. It would also help usher in a constructive relationship between UK and EU following Brexit.

According to polls, Starmer is the clear favourite to be the next UK Prime Minister. Labour has made a dramatic turnaround since the general election of 2019 – including the ousting former leader Jeremy Corbyn, and the easing of previous spending commitments. Labour has been on a “smoked salmon offensive” for years to attract big business.

They wrote: “We think the market impact will net positive.” The current Labour Party occupies a platform that is centrist, and we are moving away from the perception of paralysis in policy.

“Labour’s agenda is modestly growth-oriented, but with a prudent fiscal approach.” Our economists think that given the lack fiscal space, Labour is likely to focus on supply side reforms in order to improve economic growth.

Bloomberg News published a poll on Monday that included 268 readers and users who use its Financial Markets Terminal. More than half said a Labour victory would be best for the pound.

Derek Halpenny, Lee Hardman and MUFG wrote in a letter last week that Labour spending plans are “unlikely” to cause investor concern. The MUFG analysts wrote that Labour is likely to take a lesson from the Conservative Party under Liz Truss. Truss’ premiership quickly spiraled into chaos when financial markets became alarmed by unfunded tax reductions. Under Truss, the pound dropped to its lowest level ever against the US of $1.0327 compared with $1.27 Monday.

Labour has pledged to adhere to fiscal rules. This includes not borrowing money to cover daily government expenditures and reducing net public debt in proportion to GDP over a forecast period of five years. Halpenny and Hardman said: “There is nothing bold about this, no change in fiscal frameworks and Labour will essentially commit to the same fiscal restrictions that are currently in place.”

Matthew Ryan, head of the market strategy department at Ebury Financial Services, wrote Monday that the prospect for a Labour-led government “actually boosted sterling” compared to the euro. The euro has been affected by the uncertainty about how much power the far-right parties will have after the European elections, and Emmanuel Macron’s decision to call a snap election in France.

JP Morgan strategists prefer the domestically-focused FTSE 250 index of mid-sized London-listed companies over the blue chip FTSE 100 which is more international in focus.

JP Morgan’s assessment of Starmer’s Labour is in stark contrast with its disapproval of Corbyn policies, which include nationalisation of several sectors. JP Morgan stated in 2019 that a Labour-led government would “weigh heavily” on foreign investors’ minds.

JP Morgan stated that not all large businesses would be happy with a Labour-led government in 2024. They cited the nationalisation promised of the rail network, and the proposals to raise taxes on energy companies. JP Morgan said that not all big business would welcome a Labour government in 2024.

On Monday, the pound reached a 22-month peak against the euro as Emmanuel Macron surprised the market by calling quick parliamentary elections for France. The pound reached EUR1.1847 for the first since August 2022.

Macron’s surprise move hit Paris stocks as well. The CAC 40 fell over 2% in one point and closed the day down by 1.35%. Germany’s Dax ended the day with a 0.35% decrease after the coalition of German chancellor Olaf Scholz suffered losses in the EU election.

French bond prices fell, which led to a wider gap between Paris’ and Berlin’s borrowing cost. The yield on France’s 10-year bonds (the interest rate) has risen to 3.23% from the previous night of 3.115%, which was the highest since November last year.

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