Financial markets keenly watching political dynamics

Political risks are likely to dominate the financial markets in the coming week with one expert saying that the decisions by France President Emmanuel Macron to call a snap election will impact market confidence.

Susannah Streeter, head of money and markets, at Hargreaves Lansdown explained:  ‘’The snap election called in France has added to the uncertain tides swirling around financial markets, pushing the FTSE 100 down in early trade. Investors are assessing Macron’s gamble in attempting to reassert his authority after voters shifted en masse to the Far-right during the EU elections, in both France and Germany.

“The euro has dropped sharply against the dollar, to $1.074, the lowest in a month amid the surprise turn of events. It comes amid fresh concerns about high interest rates lingering for longer in the US, the world’s largest economy. Friday’s fresh labour market data indicated that the jobs market in the US remains remarkably buoyant, while wages grew by more than expected, denting hopes for cuts in borrowing costs to come sooner.”

She added the snapshot of the UK labour market out on Tuesday will be used to help take the temperature of price rises. Bank of England policymakers will want to see signs that pay restraint is increasing before cutting interest rates. Although a June rate cut looks highly unlikely. August is still possible although financial markets aren’t fully pricing in a reduction until November.

“The main UK parties are marching forward with other policy details in their manifesto launches this week, with the Lib Dems expected to be revealed today,” Streeter continued. “As widely trailed, commitments not to raise personal taxes or VAT are set to be central to both Labour and Conservative campaigns.

“Labour is also expected to say it won’t reinstate the Lifetime Allowance for pensions, the controversial tax which the government dropped at the Budget. But with the public finances super-stretched due to sluggish economic growth and the debt rules both main parties are adhering to, speculation will keep swirling around what’s omitted rather than included in manifestos., with an expectation that more tax revenue will have to be raised at some point to meet current spending pledges.

“Given the current polls predicting a Labour landslide, there will be keener eyes trained on its plans for the future. Labour’s determination to be seen as economically credible may limit its ability to make immediate inroads into fulfilling its other central pledge of saving the NHS. Kier Starmer has vowed to abide by tough spending rules to be seen as responsible with the country’s financial health.”

She continued: “The pledge to kickstart the building of 1.5 million new homes by shaking up the planning system and fast-tracking urban brownfield sites for development would benefit the housebuilders who have had to deal with weaker demand in an era of high interest rates and slow approvals of new sites. However, it remains to be seen just how quickly this streamlining of the planning system will take effect.

“Labour intends to set up Great British Energy, a publicly owned clean power firm, with the running costs to be paid through increasing the windfall tax on oil and gas company profits from the North Sea. This would mean the current Energy Profits levy, would increase from 75% to 78%.

“However, it’s not clear exactly how much would be raised due to the volatility of oil and gas prices. A levy specifically on oil and gas in the North Sea is also likely to affect smaller companies rather than larger energy giants, given that they have less capacity to absorb tax changes, and it may lead to fewer contracts being clinched in the supply chain because of this. Labour also intends to draw new licensing rounds to a close, limiting future revenues streams for companies already operating on the UK’s continental shelf.’’

“The main UK parties are marching forward with other policy details in their manifesto launches this week, with the Lib Dems expected to be revealed today, as widely trailed, commitments not to raise personal taxes or VAT are set to be central to both Labour and Conservative campaigns.’’

Susannah Streeter, Hargreaves Lansdown

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