The general election was suddenly held early, and interest rate cuts have gone awry!

Golden10 Data ·  May 24 08:43

Source: Golden Ten Data

Market strategists are beginning to gamble on the prospects of the British election. Wall Street predicts that it is impossible for the Bank of England to cut interest rates in June.

British Prime Minister Sunak unexpectedly announced this week that the summer general election will be held on July 4. As the UK election looms, investors are weighing the impact the new government may have and looking for ways to deal.

Although the market generally believes that polls show that Labor's overwhelming advantage is reflected in the market, Jefferies (Jefferies) strategist Mark Braley said that if the Labour Party introduces a more expansionary economic policy, British housing construction and utilities stocks will be one of the most sensitive industries.

Citigroup wrote that after the Labour Party wins, the FTSE 250 index, which consists of smaller stocks that focus more on the domestic market, will often beat the more international FTSE 100 index.

Susana Cruz, strategist at Liberum Capital Ltd., said, “The chaos of the past five years is coming to an end. I think the plans of the new government (most likely the Labor Party) will target the stability that businesses seek. But in terms of incentives, spending, and tax cuts, we don't think there's much room.”

Of course, Labor's victory is not inevitable; there is still enough time to change the polls. Jeffrey's Braley wrote that if the Conservatives had the upper hand, it would boost British banks such as Lloyds Bank Group and NatWest Group. He added that concerns about the suspended parliament could have a negative impact on banks, homebuilders and retail companies.

In recent weeks, the UK stock index has rebounded due to soaring copper and gold prices, as well as the market's shift to less expensive, more defensive stocks. Since the end of February, the FTSE 100 and FTSE 250 have risen by about 9%, double the returns of the S&P 500 index and the European Stoxx 50 index.

So far, the market has reacted calmly to the prospects of voting in the July British general election. Some strategists have pointed out that unlike previous elections, the policies of the Conservative Party and the Labor Party are not much different. A strategist at ING Bank (ING Bank) wrote that drastic changes like Brexit or the Scottish referendum are unlikely to happen this time around, and neither party has promised complete change.

They wrote, “Elections may bring noise, not direction, to the money market.” ING said the bigger problem facing British investors is the possibility of cutting interest rates this year.

Citigroup strategist Beata Manthey said she is still more optimistic about the European stock market than the UK stock market because the UK economy continues to weaken. “Fiscal policy differences between political parties are likely to be minimal, which means that the trajectory of inflation has the greatest impact on UK interest rates,” she wrote.

According to Citigroup's analysis, defensive stocks and financial stocks tend to perform best after the election. According to their calculations, British stocks have historically been flat or falling within six months after voting for the election, but they have risen by about 6% after the Labour Party won.

HSBC Holdings Plc (HSBC Holdings Plc) is optimistic about the UK stock market, but predicts that the market's reaction to the election may be lackluster. Strategist Edward Stanford raised this year's FTSE 100 rating because valuations are cheap and rising commodity prices have boosted UK mining stocks. “With public sentiment so low, optimism doesn't need much to return,” he said.

Wall Street predicts that it is impossible for the Bank of England to cut interest rates in June

A Bank of England spokesperson said that the central bank has cancelled all speeches and public statements made by policy makers during the UK election. Basic matters will continue, including the interest rate decision of June 20, but individual members of the Monetary Policy Committee will not speak publicly until after the July 4 general election.

The Bank of England will release the “Financial Stability Report” on June 27. This report is a financial risk report updated twice a year by the Bank of England. The press conference held at the same time as the Financial Stability Report will be cancelled.

Michael Saunders (Michael Saunders), a former Bank of England policymaker, said that the prospect of interest rate cuts in June has disappeared for the time being, but the market may have underestimated the possibility of interest rate cuts later this year.

The senior adviser at the Oxford Economics Institute (Oxford Economics) said that the inflation data released on Wednesday was stronger than expected, making it very unlikely that central bank officials will act next month. The government's decision to hold an early general election further reduced this possibility.

Speaking about the Bank of England's monetary policy committee in an interview on Thursday, Sanders said, “They themselves don't want to be the cause of volatility. The Monetary Policy Committee is particularly reluctant to change interest rates abruptly during the election campaign. But in reality, the inflation data has ruled out the possibility of interest rate cuts in June.”

If interest rates were cut in June, it would be the Bank of England's first move in 10 months, and it would also surprise the market. The market has already minimized the possibility that the Bank of England will cut interest rates next month. Sanders said that the first rate cut may be in August, that is, after the election of a new government on July 4.

Although a set of price data will be released before the June meeting, Sanders doubts this won't change anything. He said, “These data must be excellent in order for expectations of early interest rate cuts to resurface.” Sanders said on Bloomberg Radio: “I do think the market may now slightly underestimate the extent of interest rate cuts this year. I still think there will be three interest rate cuts, the first time until August, and then 2 more later this year.”

Some of Wall Street's biggest banks have also been forced to reconsider when the Bank of England cuts interest rates. Economists at banks such as Goldman Sachs, Morgan Stanley, HSBC Holdings, and Barclays all now expect the Bank of England to cut interest rates in August rather than at the upcoming June policy meeting.

Since August of last year, the Bank of England's key interest rate has remained at 5.25%, the highest level since 2008. Simon Wells, chief European economist at HSBC said, “The June Monetary Policy Committee meeting is likely to be a thrilling meeting, and strong inflation data may make the prospects for interest rate cuts confusing.”

Analysts at Barclays Bank, including Jack Rejected, wrote in a report: “The communications lockdown period for the general election will hinder the Commission's ability to warm up and then explain interest rate cuts in June. This further strengthens our belief that it is impossible to cut interest rates in June, and that central bank interest rates will not begin to be lowered until later this year.”

The translation is provided by third-party software.

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