Labour’s landslide victory in Thursday's UK general election has ushered in a momentous shift in British politics after 14 years of Conservative government, though you might not know it from looking at UK financial markets.
UK stocks, bonds and sterling registered modest gains on Friday following Labour's historic win. But traders say the most notable thing about UK markets in recent weeks is how quiet they've been, contrasting with more dramatic moves in French assets following the announcement of snap parliamentary elections across the Channel.
Pollsters have long viewed the UK election as a foregone conclusion. Labour has also refrained from promising to make any dramatic changes to UK public finances – unlike more extremist parties that look set to gain greater power after France's second round of voting on Sunday.
Overall, that relative political stability in the UK has reduced potential trading opportunities and kept a lid on market volatility.
"This election has been pretty unusual because the outcome seemed to be so certain," said Jamie Searle, head of European rates strategy at Citigroup. Markets have historically priced in an “uncertainty premium” around political events, Searle said, typically expressed through one-month implied foreign exchange volatility spiking.
“This time around there was no spike, which is the best indicator that the market was treating this election as a non-event,” he said.
A senior equities banker at a major dealer said there had been "an unbelievably low amount of trading" around the UK leading up to the vote. “There are lots of trades we've been putting out there that people could look at, but no one's interested," he said.
There was some reaction to the Labour victory when markets opened on Friday. The domestically focused FTSE 250 index was up 1.3% in early afternoon trading and was outperforming the more international FTSE 100. Benedicte Lowe, equity derivatives strategist at BNP Paribas, said the FTSE 250 has historically fared better after Labour wins.
"What we're seeing from Labour’s victory and a more centrist government is more stability for UK equities and a positive fiscal path going forward – which is even more impactful for domestic UK equities within the FTSE 250 than it is for those in the FTSE 100,” she said.
Strategists have doubted that the election would have a big impact on Gilts because of Labour's plans to keep taxes and spending largely steady. But with the election out of the way, attention could shift to the Bank of England starting to loosen monetary policy by cutting interest rates, potentially as early as August.
“Our house view is that the BoE delivers an interest rate cut in August of 25bp,” said Yusuke Miyairi, FX strategist at Nomura, who said the market is pricing in a 65% probability of that happening.
Ten-year Gilt yields fell about 5bp to 4.15% in early afternoon trading. Sterling, meanwhile, was up slightly against the US dollar at about US$1.28. Some believe the pound's rise has further to run.
"We've got a return to more stable politics in the UK, which contrasts with some of the other major economies where there is more uncertainty," said Sam Lynton-Brown, head of global macro strategy at BNP Paribas. "Our view is the outcome of this election is bullish for the pound, but reaction in the market is likely to be borne slowly rather than quickly."