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• US equities were the strongest major region in sterling terms (+1.9%), followed by another strong week for Asia and emerging markets (+0.5%-0.8%)
• Outside of Europe, Bonds broadly gained in local currency terms, with gilts up +1.7%

• European equities slumped -3.5% in sterling terms, hindered by rising political fears
• The UK and Japanese equity markets also weakened in sterling terms, falling -1.2% and -0.6% respectively

With the election now weeks away, both the Conservative and Labour parties have unveiled manifestos. Neither party has announced radical or surprising policies, with significant chunks of proposed policy already announced ahead of publication. Both policies are, theoretically, fully funded, reflecting the limited fiscal headroom available to the new executive.

Labour’s manifesto focusses on the party’s five key missions: kick starting economic growth; boosting the UK’s clean energy capacity; addressing public safety; reforming childcare and education and addressing problems with the NHS.

Sectors in focus include industry, with a new industrial strategy to be backed by a £7.3bn National Wealth Fund. On housing, they plan to build one and a half million homes, aided by the implementation of new planning reforms. And an £8.3bn investment is earmarked to establish Great British Energy, a publically owned company to co-invest in leading technologies.

The plan is fully funded from a range of sources, including new tax measures. However, Labour also hopes to raise c. £5bn from clamping down on tax avoidance, which could be optimistic.

Key tax proposals include: introducing VAT on private school fees; ending nom-dom tax breaks; extending and raising the oil and gas windfall tax; a 1 percentage point increase in stamp duty for foreign purchasers of property; ending the carried interest tax break (which has been a benefit to private equity fund managers in particular), and capping corporation tax at 25%.

The Conservative manifesto focusses on cutting personal taxes, changes to education, boosting defence spending, capping immigration and a range of measures to “strengthen communities”.

The Conservative plan is also fully funded, with tax cuts funded by curbs to welfare support, as well as the same potentially ambitious £5bn of savings proposed by Labour through a reduction in tax avoidance. However, curbing migration could hit tax revenues, a cost which is not reflected in the manifesto costing.

With Labour still around 20 points ahead in the polls, a healthy Labour majority seems likely, which could be a relatively market-friendly outcome. However, with the Conservatives loosing support to other parties, including Reform and the Liberal Democrats, significant upsets across many Parliamentary constituencies could unsettle market participants.

European elections demonstrated how electoral upsets can move markets. European Parliament elections saw rising support for populist candidates in several countries, including France, where the right-wing nationalist party, the National Rally won more than 30% of the vote - more than twice the share of Macron’s own Renaissance party.

In response, Macron called snap parliamentary elections on 30 June and 7 July, just ahead of the Paris Olympics. The announcement caused French government bonds and French-listed equities to fall sharply as investors reappraise France’s country risk.

Market participants likely fear that a change in the makeup of parliament will hinder growth. While Macron is unpopular with the electorate, the economy has prospered since he was elected in 2017, with strong employment growth. Macron also introduced key economic reforms, including raising the retirement age. National Rally’s campaign promises to reverse this policy, while the party also seeks greater distance from the European Union.

Polls currently suggest that the eurosceptic, anti-immigration National Rally, headed by Marine Le Pen, will get 33% of votes in the first round on 30 June - although together with allied parties the populist right could hold as much as 37% of the vote share. While National Rally is unlikely to win a Parliamentary majority, it may win enough seats to have a say in decision making, which could hinder further reform. This could also undermine stability within Europe as a whole.

In a week dominated by politics, central banks stood pat. Both the US Federal Reserve (Fed) and the Bank of Japan (BoJ) left key policy interest rates unchanged in the June meetings, though there were some updates to wider monetary policy.

In Japan, the BoJ did announce plans to slow the pace of asset purchases, with more detail to be revealed in July.

In the US, the Fed updated guidance, showing modestly greater optimism regarding the progress of inflation. New projections for the Fed Funds also suggested that Federal Open Markets Committee (FOMC) members expect to cut rates less than they did back in March, with only one cut expected this year and rates remaining slightly higher throughout the forecast.

While the pace of Fed cuts has been scaled back significantly since the start of the year, recent data has shown some easing in both inflation and the labour market, increasing the chances of gradual cuts commencing later in the year.

 

 

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