Stock market reacts positively to new government
The FTSE 250 had a strong positive reaction to the election of a new Labour government this morning (5 July)
An initial 1.8% gain in early trading for the FTSE 250 was the second highest rise for the first day of a new UK prime minister since the mid-cap index was created in 1994.
Analysts explained that while the market could still move in a different direction as the day progresses, the initial reaction was “promising”.
“The general election has resulted in a significant political shift for the UK and investors appear to welcome the changing of the guard, judging by how the more domestically focused FTSE 250 got off to a very strong start,” said Dan Coatsworth, investment analyst at Manchester headquartered investment platform AJ Bell.
He said that today’s market reaction is significantly better than the last time Labour took over from the Conservatives in government, whereby the FTSE 250 dipped 0.1% on Tony Blair coming into office in May 1997.
“That’s interesting given the backdrops are similar for both Blair and Starmer coming into power, namely that it felt like the country was ready for a big change,” he said.
“The FTSE 100’s 0.4% gain today is the best market reaction for the first day of a new UK prime minister since the blue-chip index was created in 1984. Driving the market on Friday was AstraZeneca, Glencore and Lloyds, so a broad mixture of sectors and not a full set of pure UK plays.”
Sterling nudged up 0.1% to $1.2776 just after 7am from $1.2759 when the polls closed last night. Gilt yields saw little change too.
Coatsworth said there is often a sense of nervousness ahead of markets opening the day after a general election, but extreme volatility only tends to flare up when investors are caught by surprise. This time round, he said, there was nothing to get heads spinning as the result was widely expected.
“Instead, investors appeared to welcome the news with open arms,” he said.
He added: “Theoretically, we could see a snowball effect whereby the more the UK market goes up in response to the election, the more people start to get drawn in. There is no guarantee that will happen, but such a response would certainly be long overdue given how UK equities have been unloved since the Brexit vote in 2016.
“Labour talked a lot about wanting to boost the economy and help businesses during its election campaign. Now comes the hard part and delivering on its promises. Public finances aren’t in the best shape given high levels of debt and it will take a lot of hard work to accelerate economic growth. For now, Labour has a period of grace to settle into office and fine-tune its strategy, but investors can be impatient at the best of times and failure to produce positive results as we move into 2025 could see sentiment start to shift.”
