Election Season - Is A Shift To The Left, Right For Markets?

20th July 2024

Daniel Douglas-Wright writing at The Private Office.

In last month's update we touched upon the French and British general elections, however at the time of writing the UK election hadn't yet taken place and the French election had only passed its first round. Now that both elections have concluded we can take a deeper dive into market reactions.

The election results
Before we get going it's worth summarising recent events, starting with the UK. Pollsters had been predicting a Labour landslide, and while they overestimated the realised vote share for Labour, due to our first-past-the-post voting system this still translated into one of the largest majorities our parliament has seen. This result should provide the foundation for a stable government with the ability to enact its desired agenda.

In France results were less conclusive, in part due to their more proportional voting system. Le Pen's National Rally party won the largest vote share of any individual party, however due to the fractured nature of their parliament, with three roughly equal coalitions, it seems unlikely that a government will be formed in the very near term. This will not provide the foundation for a stable government with the ability to smoothly enact its desired agenda.

Market reactions to the UK election result
The UK had looked like a bit of a political basket case over the last few years, so the contrast of that to a new stable government is stark and has not been lost on international investors.

The first port of call for market reactions to government policy, particularly the reactions of international investors, are the currency markets, where sterling has seen significant strength since the election results.

Because the results were fairly certain, currency markets began to price-in a Labour victory at the start of the election week, so the chart below starts there.

The blue line shows sterling against the Japanese Yen, the yellow line sterling against the Swiss Franc, the white line sterling against the US Dollar, and the orange line sterling against the Euro.

For more details and charts go HERE