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UK Elections: Pound sterling rises, bonds strengthen, stocks hit record high

The British Pound Sterling saw a notable surge on Friday, June 5, following the Labour Party’s decisive victory in the parliamentary election, Reuters reported. 

As of 07:08 GMT, the pound rose nearly 0.1 per cent against the US dollar to $1.27 and maintained a steady position against the Euro at 84.75 pence, also boosting UK government bonds and the stock market.

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The FTSE 100, the UK’s benchmark stock market index, opened with a 0.38 per cent gain, while midcap stocks surged 0.4 per cent higher. Meanwhile, the yield on 10-year government bonds fell three basis points to 4.17 per cent, mirroring the trend in other European markets.

The Labour Party secured a decisive majority in the 650-seat parliament, defeating the Conservative Party led by Rishi Sunak, which suffered its worst performance in history. The election outcome reflected voters’ discontent with the rising cost of living, deteriorating public services, and a string of scandals that plagued the Conservative government, according to the report.

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Ben Ritchie, head of Developed Market Equity at abrdn (a global investment company), told Reuters that the landslide victory provides the clarity and stability that the equity markets need in an increasingly volatile world.

“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,” he said.

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The pound has been the strongest performing currency against the dollar this year, rising 0.3 per cent. It has indicated up movement since Rishi Sunak called for the elections in late May, earlier than expected.

The pound is now back to where it was in 2016 at the time of the Brexit vote, considering traders’ and investors’ belief that a period of market volatility fuelled by political and economic issues may be coming closer under the Conservative Party.

Kenneth Broux, the head of corporate research for FX and rates at Societe Generale, told Reuters about his expectations of knowing about the Labour Party’s win and how he feels that this isn’t a game-changer for sterling.

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“Investors have been long sterling, and sentiment has been good, and the results won’t change that,” said Broux. “We now want to know what Labour’s plans are,” he said.

The premium that investors demand for high-risk UK bonds compared to top-rated German 10-year bonds has remained stable this year at nearly 160 basis points, a far cry from the 230 basis points seen in 2022 during the mini-budget crisis.

The stocks have hit a record high this year, supported by slow growth, a comparatively stable economy, and decelerating inflation.

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The market chaos triggered by former Prime Minister Liz Truss’s “mini-budget” of September 2022 is still fresh in investors’ minds, which will give a new government little room to increase spending. Keeping up investor trust will be most important in a challenging economic situation.

“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 books are going to be balanced is a key question,” Pepperstone senior research analyst Michael Brown told Reuters.

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The UK has suffered the highest inflation and interest rates in the developed world in the last few years. The 10-year benchmark government bond yields have risen nearly 4.2 per cent this year as investors sold debt based on their expectations of interest rates taking longer to fall than anticipated.

Analysts said the Bank of England is expected to reduce interest rates in August or September meetings, and investors focus on monetary policy.

HomeNewsworldUK Elections: Pound sterling rises, bonds strengthen, stocks hit record high after Labour secures parliamentary majority

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