UK election date lifts fog over promising market recovery

A surprise British general election in July has removed a layer of uncertainty for UK markets, leaving investors to focus on the outlook for interest rates and the economy as the dominant forces driving the pound, stocks and bonds.

Prime Minister Rishi Sunak called a general election for July 4 on Wednesday, after data showed British inflation dropped to 2.3% in April, hoping to turn around the Conservatives’ dismal polling numbers with a message that the economy has turned a corner.

Most investors are working on the assumption that Keir Starmer will become the next premier, with his opposition Labour party consistently around 20% ahead in the polls.

A shared aim of Sunak and Starmer will be to avoid upsetting a tentative calm in markets with any major fiscal announcements, analysts say.

Former Prime Minister Liz Truss in 2022 sent UK government bonds and the pound crashing with plans for huge tax cuts that would have caused the budget deficit to soar.

UK markets have had a volatile three years, thanks to high inflation and Truss’s brief premiership, but have recently found a footing with the FTSE 100 (.FTSE), opens new tab stock index at record highs, sterling rising and big investors buying government debt.

Sunak’s announcement on Wednesday pushed the pound slightly higher and stock futures a touch lower.

“This (election) is something that the market has been anticipating for a while,” said Emmanouil Karimalis, rates strategist at lender UBS. “The fact that this has been brought forward may be good for the market, considering there was some speculation about more fiscal stimulus before a likely autumn election.”

Karimalis said investors will pay particular attention to Labour’s plans but will continue to be influenced by the domestic and global economy.

“Bottom line, I do not foresee the general election campaign and vote impacting the gilt market in the coming weeks materially,” he said.

Ben Laidler, global markets strategist at trading platform eToro, said he sees similarities to former Labour Prime Minister Tony Blair’s landslide victory in 1997.