Britain's Labour Party cruises to election victory

LONDON (Reuters) -Keir Starmer vowed to bring change to Britain as its next prime minister after his Labour Party surged to a comprehensive win in a national election on Friday, ending 14 years of often tumultuous Conservative government.

The blue-chip FTSE 100 index rose 0.35%, midcaps rose 1.6% to their highest since April 2022, led by gains in homebuilder stocks.

The yield on 10-year British government bonds, or gilts, dropped 3 basis points to 4.17%, slightly outperforming European peers.

Sterling was up 0.1% on the dollar at $1.2777 and a whisker softer against the euro which was at 84.78 pence .

Markets have been priced for a Labour government with a strong majority in parliament supporting its centre-left policies and focus was shifting to the challenges ahead.

COMMENTS:

ARUNA KARUNATHILAKE, PORTFOLIO MANAGER, FIDELITY, LONDON:

“We think the formation of a Labour-majority government will have a positive impact on house-builders and construction materials. We expect Labour to reinstate house-building targets and perhaps also fund investment in local planning departments, which are under-resourced and inefficient and contribute to delays in the system. That should alleviate builders’ concerns about planning bottlenecks impeding growth in the medium term."

“Both the Labour and Conservative parties now also seem to be more supportive towards banks, viewing them more as a source of much-needed investment and lending to the economy, rather than a pariah industry to be regulated and taxed. We will be listening closely to any change in mood music once the new government is in place."

DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT CIO, LONDON:

“A majority of this size should enable the new government to comfortably pursue its policy agenda. The new government has indicated plans for modest, targeted tax rises to fund spending and investment. However, against a backdrop of fiscal consolidation, the impact on the economy is expected to be minor.”

“The pound barely moved in overnight trading, reflecting the anticipated nature of the result. Looking ahead, a period of political stability and falling inflation, which would give the BoE the green light to cut interest rates, should be supportive for high-quality fixed income assets in the UK. UK equities, which we currently rate as most preferred, should also continue to see their discount to global equities narrow.”

BEN RITCHIE, HEAD OF DEVELOPED MARKET EQUITIES, ABRDN, LONDON:

“A landslide victory provides the sort of clarity and stability that equity markets need in an increasingly volatile world. Labour’s pro-growth agenda is key to delivering the tax revenues needed to fund public services, with private capital playing a vital role in supporting investment."

"If the new Government get this right, businesses with significant exposure to the UK economy should be the likely winners - a shot in the arm in particular for companies in the FTSE 250 and FTSE Small Cap. With just a little more patience, investors could finally be rewarded.”

EMMANOUIL KARIMALIS, RATES STRATEGIST, UBS INVESTMENT BANK, LONDON:

"Despite the landslide victory, we expect a more muted market reaction, as the election result is in line with the UK opinion polls throughout the campaign. The market-moving event should be the first Labour budget. This should shed more light on the new gilts funding remit."

"We see limited risks of fiscal slippage in the near term, but fiscal concerns are likely to persist over the medium term, resulting in higher term-premia and steeper curves."

BEN NABARRO, CHIEF UK ECONOMIST CITIGROUP, LONDON:

"The landslide victory for Labour implied by the exit polls is likely to surprise no one. With almost no uncertainty premium priced into the market, there is nothing to price out. Instead, gilts will be waiting to see if there are any first week policy surprises, but it seems unlikely that the new government will want to give any impression of fiscal shortcuts."

"More likely, the focus will likely be on preparations for an austere fiscal event in the autumn that emphasizes the challenges ahead. In terms of this year’s gilt borrowing needs, there is nothing in the manifesto to suggest an immediate change."

PAUL DALES, CHIEF UK ECONOMIST, CAPITAL ECONOMICS, LONDON:

"The big shift in the political landscape that has delivered the first Labour government since May 2010 is unlikely to lead to anything like as big a shift in the economic landscape."

"But at the margin, the policies of the new Labour government generate some upsides to our GDP, inflation and interest rate forecasts. The stability of the pound overnight is no surprise as a Labour win was already priced into the markets."

CATHAL KENNEDY, SENIOR UK ECONOMIST, RBC CAPITAL MARKETS, LONDON:

"A watchword of the incoming government is ‘stability’ both in terms of politics and policy making. That extends to the Bank of England, where the manifesto commits labour to preserving the BoE’s independence and 2% inflation target."

"Rachel Reeves, expected to be appointed Chancellor of the Exchequer in the new government, has downplayed the prospects for an immediate post-election fiscal event. Pointedly, she has said that with the advent of the Office of Budget Responsibility (OBR) means that the state of the UK’s public finances is now more transparent.

So it doesn’t appear as if there’ll be an ‘opening of the books’ emergency budget straight after the election.

LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS, LONDON:

"With markets having had the best part of three years to get comfortable with the idea of a Labour government, little reaction is to be expected in the near term.

With political turmoil hitting other developed economies at the same time, this huge majority may present the UK to investors as somewhat of a political safe haven – a known quantity that should give businesses confidence in the environment they operate in.

But looming over all of this is the economic backdrop. This election might be remembered as one where, chastened by the impact of the Truss/Kwarteng budget, the average politician became vastly more conscious of the fiscal deficit, the debt to GDP ratio and the ultimate fragility of the gilt market. Whilst likely to act as a break on future borrowing, it also makes their job of delivery an awful lot harder as a result."

MICHAEL BROWN, SENIOR RESEARCH ANALYST, PEPPERSTONE, LONDON:

"The result was bang in line with what markets priced six weeks ago, right at start the start of the campaign. So, no surprise that cable is flat as a pancake.

"There is a lot of spending that (Labour) have pledged as well and only 20 billion pounds’ worth of fiscal headroom – give or take – so how those book are going to be balanced is a key question.

And this plan for growth, 2.5% annual GDP growth is punchy, if I’m being kind, kind of fanciful if I’m being slightly less kind and if we don’t get that growth relatively quickly, you could be looking at a pretty significant fiscal tightening going on."

(Compiled by Dhara Ranasinghe, Amanda Cooper, Samuel Indyk, Naomi Rovnick, Sinead Cruise and Alun John)