Resume af teksten:
Storbritanniens lokalvalg udgør en potentiel markedsrisiko. Obligationer, kendt som gilts, har nået renteniveauer over 5% for første gang siden 2008. Premierminister Keir Starmer står overfor politisk udfordring med Frygten for en høj nederlagsprocent blandt Labours pladser i fare. Reform UK stiger i meningsmålingerne og truer både Labour og konservative parter. Et dårligt resultat for Labour kunne øge usikkerheden om Starmer’s lederskab og potentielt rokere markedssituationen. Politisk usikkerhed kan hæve låneomkostninger samt presse den britiske obligationsrente opad. På valutamarkedet viser sterlingsværdien en lille prægethed på valgdatoen, men energipriser tegner stadig et mere dominerende billede. De endelige markedsbevægelser afhænger af den politiske udvikling og den økonomiske politik, som nye ledere kunne føre.
Fra ING:
Britain’s local elections are a potential market flashpoint. Minimal political risk is priced, even as bond yields hit post‑2008 highs of 5%. Borrowing costs could initially climb if the political situation worsens, but a leadership change need not materially alter the fiscal or Bank of England outlook
UK Prime Minister Keir Starmer is in a fight for political survival
Local elections: What’s happening and why it matters
Britain’s local elections come at a particularly sensitive moment for UK financial markets. Government bond – gilt – yields have just risen above 5% for the first time since 2008, a time when the economy was growing significantly faster than it is today. Much of the latest spike is down to inflation, but the politics can’t be ignored. Prime Minister Keir Starmer is in a fight for political survival and a bad election night on 7 May could prove fatal.
Up for grabs are 5013 local council seats – a little over a quarter of Great Britain’s total – plus the Scottish and Welsh parliaments. Starmer’s Labour Party looks set to lose up to 90% of the 2268 of its council seats up for election, according to some predictions .
The scale of the defeat will be key. But so too is what drives it.
We know that Nigel Farage’s Reform UK is likely to be the main beneficiary of May’s elections. The party is running between 25-30% in national polls, up from 15% at the 2024 election. Much of that gain has come at the expense of the Conservative Party, but Reform’s rise still poses an issue for Labour.
In Britain’s First Past the Post electoral system, general elections are typically won or lost depending on whether the left or the right is more divided. And Reform UK’s increasing dominance of the political right comes as the left is increasingly split.
The rise of the Green Party is a bigger issue for Labour than Reform UK
Solid line is the one month moving average
Source: YouGov
Labour, the Lib Dems and the Green Party are all polling between 14-17% nationally. That’s a collapse from 34% at the last election for Labour, but crucially a surge for the Greens, whose share has doubled from 7% in June 2024. If a general election took place tomorrow, Reform would be much more likely to command a majority in Parliament.
To illustrate the point, at 14% of the national vote, Reform won just five seats at the 2024 election. At 24%, that would surge to 188 seats; at 31%, it’s 335, according to Multi-level Regression and Post-stratification (MRP) polling by Electoral calculus in January and April of this year. 326 seats are needed for an outright majority.
Britain isn’t on the brink of a general election. The next vote isn’t until 2029. But Labour’s fortunes in three years’ time rely on stemming the tide of votes to the Greens and other left-wing parties. A big defeat at the local elections would inevitably focus minds within Labour on what it needs to do to win back support. Polymarket puts a 67% chance on Starmer leaving office by year-end.
20% of Labour 2024 voters would now vote Green
Source: YouGov
How bad would a leadership contest be for markets?
Gilts are already under scrutiny due to inflation risks, and adding political uncertainty to the mix could further push (global) investors to look elsewhere. Whilst we’ve seen some swings in gilt yields on days with political headlines, we estimate the risk premium on 10Y gilts is still limited. If the situation were to escalate or a leadership contest were to be triggered, the 10Y yield could easily rise another 10-20bp, which would be in line with the nervousness seen in markets prior to the budget announcement last year.
The chain of logic among investors looks like this: a new Labour leader and prime minister would likely mean a new chancellor. A new chancellor, under pressure to take the party towards the left to counter the threat posed by the Green Party, might be more pro-spending. That potentially means new, looser fiscal rules. And new fiscal rules would likely mean more borrowing.
There’s virtually no risk premium in 10-year gilts
Source: Macrobond, ING
But the reality might be more nuanced. The infamous 2022 “mini budget”, which sparked a sharp though relatively short-lived spike in yields – and mortgage rates – is well etched into the political memory in Westminster. No politician wants to risk triggering a re-run.
Sure, leadership hopefuls may criticise the Office for Budget Responsibility, the independent arbiter of Britain’s fiscal rules. Angela Rayner, the betting markets’ favourite to become the next Labour leader, has said the OBR fails to account for the wider benefits of public investment.
But that is not the same thing as proposing a new set of fiscal rules. Leadership contenders will be under heavy pressure to rule out changes.
Remember, too, that a leadership contest can only be triggered if 20% of Labour MPs (that’s 81) back a single rival candidate. Labour lawmakers might ultimately agree on the need for a new leader, but will they back the same horse?
It might not come to that. Leaders often go when their cabinet turns against them; we saw that with the departure of Boris Johnson in 2022. Nevertheless, a successful leadership candidate will need to command support from across the party. And that might require them to pick a chancellor from a different faction.
A leadership contender on the left of the party might pick someone from its right to head up the Treasury as the price of gaining sufficient support. Doing so might also help calm investor nerves about an impending surge in borrowing.
There also don’t appear to be loud calls from within the party for big fiscal loosening right now. A recent speech by two Labour MPs, representing opposite wings of the party, pitched a new economic agenda focused on supply-side policies like tax reform, over big increases in public spending. There haven’t so far been widespread calls for a large universal energy support package, either.
Political noise doesn’t necessarily boost chances of BoE hikes
The bottom line is that the near-term fiscal trajectory – borrowing over the next one or two years – is unlikely to look wildly different whoever is in charge. And notwithstanding the war in Iran, the fiscal backdrop had been looking brighter; the structural deficit was – and still could – fall this year on the ongoing freeze in tax thresholds.
That matters because it suggests domestic politics is unlikely to have a large bearing on Bank of England policy. And even if it does, it’s unlikely the next budget will come earlier than currently planned in late autumn. The Bank can’t act on fiscal policy until it is formally announced. The overwhelming focus will remain on the energy crisis and its impact on inflation.
Longer-term, the story becomes more problematic for markets – but again, we suspect this is true whether it is Starmer or someone else in Downing Street. The main fiscal rule – to bring day-to-day spending into balance with tax revenues within three years – is currently met on paper. But only by promising sizeable tax rises, many of which aren’t scheduled to kick in until 2029. Real per-capita spending on public services is also slated to fall in that year – a year, don’t forget, when the next general election is likely to fall.
In an environment where Labour is struggling in the polls, there will be a lot of pressure to either cancel or offset those plans. And that’s before considering the likelihood that defence spending plans will need to be ramped up.
FX markets price little UK election risk
In FX markets, it feels like there is fatigue over the event risk of these local elections. Sterling bears have been talking about 7 May for a couple of months now, but these risks have been swamped by developments in the Middle East. Looking at the FX options market, the volatility term curve shows just a minor kink around the local election date. And for FX options expiring around the day of the event risk, a 30 pip range is priced for EUR/GBP compared to 14 pips on a ‘normal’ day.
As above then, a fresh bout of risk premia coming through the fiscal side could demand some temporary weakening in the pound. Until, however, energy markets calm down, it is hard to see EUR/GBP breaking clear of swap differentials. These have narrowed in sterling’s favour based on the view that the BoE is going to react more aggressively (tighten) than the ECB to higher energy prices. Until the BoE can forcefully get across the view that it is going to hike less than the ECB, it seems as though EUR/GBP can linger a lot longer in the middle of a 0.86-0.88 range than most – including us – had been expecting.
Hurtige nyheder er stadig i beta-fasen, og fejl kan derfor forekomme.
