Quilter Cheviot|Weekly Comment

Politics takes a centre stage in a strong week for major markets

Our weekly market overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Last week, the MSCI All Country World Index (MSCI ACWI) rose 2.0% (13.8% YTD). But it was the political landscape that took centre stage.

The Labour party’s expected majority in the UK general election led to a calm market reaction, reflecting the belief that the lack of fiscal space and centrist political alignment will limit the scope of policy changes. UK large cap firmed 0.5% (8.4% YTD) and mid caps jumped 2.5% (7.5% YTD). The British pound strengthened versus the US dollar, ending the week at 1.28, up from 1.26.

The US election in November is seen as a more significant risk to global markets, particularly in terms of how the large budget deficit will be managed. The deepening political divide in the US could have more extensive global repercussions than the change in the UK’s leadership.

In the US, the large cap sector posted a 2.0% gain (17.6% YTD), and the tech markets continued their upward trajectory, surging by 3.5% (22.7% YTD) to reach new heights. However, the US labour market is showing signs of deceleration. Job growth in June exceeded expectations, coming in at 206k vs 190k forecast but significant downward revisions to prior months and a rise in the unemployment rate meant the overall picture was one of cooling. . These indicators, among others, might prompt the Federal Reserve to reconsider its stance. With the presidential election approaching, the Fed is expected to remain apolitical, steering clear of abrupt policy shifts. Nonetheless, at least one rate adjustment is still anticipated by year’s end.

In Europe, the French parliamentary elections stole headlines, as a left-wing coalition secured the most seats, thwarting Marine Le Pen’s far-right party in the process. France will be left in political limbo however, after no party claimed a clear majority. Despite this, market confidence has recovered, with notable gains in European indices last week: France’s large cap 40 index rose by 2.6%, Germany’s large cap increased by 1.3%, and Italy’s large cap improved by 2.5%.

UK housebuilders gain after Labour win

In the UK, the Labour Party’s victory in the General Election led to a boost for housebuilding companies, with shares increasing by 2-3% the day the result was announced. This rise is part of a broader trend that began earlier in the week, despite the UK consumer durables subsector (77% housebuilders) underperforming the wider market since the election announcement. The expectation that the new government will ease planning bottlenecks and increase the pace of building has delivered a boost.

Labour’s new policies, including a permanent mortgage guarantee scheme and prioritising first-time buyers, aim to address the ongoing housing challenges in the UK. However, the sector remains sensitive to interest rate fluctuations, with sector earnings expected to stay subdued for the foreseeable future. While interest rates are flat, volumes and margins are in opposition to one another, and only lower mortgage rates (or perhaps much higher wages) can increase prices without having knock on effects elsewhere. Sector earnings are low, and likely to remain depressed for some time to come regardless of the new government.

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