Labour wins a landslide, as pound is unconcerned by Starmer government

Labour have had a fantastic night, but ultimately, it’s the bond market that will determine Labour’s fiscal policies, not its 170 seat majority.

What a difference 5 years makes, Labour have turned themselves around and are on course to win 410 seats and a 170-seat majority, according to the exit polls conducted by the main UK broadcasters. This is slightly lower than the 179-seat majority won by Tony Blair and is also slightly short of the super majority that some had predicted before this election. However, it is a stunning win for the Labour party, it could keep them in power for many years and it suggests that the opinion polls leading up to this evening were accurate.

Muted market reaction

Since the result is broadly as expected, the pound has had a muted reaction to tonight’s news. Due to this, the focus will now shift to what the future holds. Sir Kier Starmer still needs to lay out in more detail his plans for spending and taxation, and, most importantly, how he will grow the economy. The financial markets trust that the UK’s fiscal position is secure with Labour, hence why bond yields and the pound have remained stable during this election campaign. The focus now will quickly shift to Sir Kier Starmer’s first 100 days in office, and how he lays out his economic plans to boost growth at the same time as improving public services. Investors will be watching to ensure that Kier Starmer maintains his ‘stability’ message and fiscal prudence, otherwise he could find that the bond vigilantes are never far away. Ultimately, it’s the bond market that will determine Labour’s fiscal policies, not its 170-seat majority.

What may come next for UK asset prices

We believe that in the coming days, traders will base their decisions on what they think the new Prime Minister, Sir Kier Starmer, will do in the future. Options prices suggest that no one is expecting any surprises from Labour. 3-month volatility for GBP/USD is close to its lowest level in 5 years. There is a positive skew for GBP/USD options, which suggests that traders see a positive outlook for sterling. The put/ call ratio for the FTSE 100 is mildly positive, which suggests that the market does not expect the UK’s main blue-chip index to sell off on the back of the election result. However, is this the calm before the storm?

Liquidity in financial markets is thin tonight, not least because of the 4^{th of} July holiday in the US.  The real reaction will happen in the morning, once UK markets open. It is also worth noting exit polls may not be accurate, and we still need to wait for the actual results to filter through in the coming hours. However, UK exit polls tend to be accurate, so we do not expect a major upset from here.