A Labour landslide

A Labour landslide

London’s stock markets ended the week on a mixed note on Friday, after a subdued response to Labour's general election victory, although housebuilders and the more domestically-focussed FTSE 250 made gains.

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Sir Keir Starmer and Labour won a resounding victory in the UK’s general election, ending 14 years of turbulent Conservative rule. Rachel Reeves will be the country’s first female Chancellor of the Exchequer (finance minister).

Stocks usually enjoy political stability and with Labour recording one of the largest victories in history, the UK market should do well in the coming months.

House prices remained largely unchanged in June, industry data showed on Friday, reflecting a subdued market. According to the latest house price index from Halifax, average house prices edged down just 0.2% on a monthly basis in June. On an annual basis, growth was unchanged on May, at 1.6%.

On the continent the STOXX Europe 600 Index ended the week slightly higher picking up some of the losses from the week before. Political jitters eased as the far right in France failed to win an outright majority in the first round of legislative elections on June 30.

Europe’s major stock indexes also rose, with France’s CAC 40 Index rose 1.51%, Germany’s DAX increased by 1.32%, and Italy’s FTSE MIB was up 2.51%.

In the UK the FTSE 100 Index increased by 0.49%.

Speaking at the European Central Bank’s annual retreat in Portugal, ECB President Christine Lagarde appeared to strike a slightly more hawkish tone. She said that Europe is “still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks.”

She added: “It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed.” Meanwhile, minutes from the ECB’s June meeting showed some members opposed the first rate cut since 2019 because wage growth had surprised to the upside and inflation seemed to be stickier.

In the US the S&P 500 Index continued to climb to record highs, although the market’s gains remained notably narrow. As measured by Russell 1000 indexes, growth shares outperformed value stocks by 415 basis points (4.15 percentage points), while the small- and mid-cap benchmarks recorded losses.

The technology-heavy Nasdaq Composite ended the week 73.71% off its lows since the market began its rebound in mid- to late-2022, while the more value-oriented and narrowly focused Dow Jones Industrial Average had gained less than half of that amount, 32.79%.

Expectations for lower interest rates, fed by signs of weakening growth and easing inflation pressures, seemed to remain a major factor in favouring growth stocks by placing a lower implied discount on future earnings.

On Monday, the Institute for Supply Management (ISM) posted its lowest reading of manufacturing activity (48.5, with levels below 50.0 indicating contraction) since February. A separate reading also showed a surprise contraction in construction activity.

In Asia, Japan’s stock markets gained ground, with the Nikkei 225 Index climbing 3.36% and the broader TOPIX Index advancing 2.65% in local currency terms. Both indexes hit all-time highs during the week, propelled in part by weakness in the Japanese yen, which is typically a tailwind for export-focused industries. The yen strengthened a bit later in the week.

The yield on Japan’s 10-year sovereign bonds climbed to about 1.1%—its highest level since 2011—before easing somewhat with U.S. Treasury yields later in the week.

Chinese equities fell as underwhelming manufacturing data reinforced concerns about the slowing economy. The Shanghai Composite Index and the blue-chip CSI 300 both registered modest losses for the week. In Hong Kong, the benchmark Hang Seng Index gained 0.46% during a holiday-shortened week, according to FactSet. Markets in Hong Kong were closed on Monday for the Special Administrative Region Establishment Day.

China's manufacturing sector shrank in June for the second consecutive month, government data showed. The official manufacturing purchasing managers’ index (PMI) reached 49.5 in June, unchanged from May, as new orders and exports declined. The figure missed the 50-mark threshold separating growth from contraction. The nonmanufacturing PMI, which measures construction and services activity, rose to a below-consensus 50.5, down from 51.1 in May.

The Week Ahead

It's a pretty quiet week in terms of the volume of releases, but on Thursday we see the latest monthly UK GDP estimate (zero growth is forecast, though the three-month average is expected to remain at 0.7%) along with trade, services, industrial production and construction data from the ONS.

In the US Fed Chair Powell is giving a speech on Wednesday and then we will see an update for the consumer price index which will be the big focus for markets. We are expecting the headline CPI rate for June to be up 3.1% on a year ago, down from 3.3%, with core CPI up 3.5%, picking up from 3.4% in May.

A softening of inflation could lend support to a potential interest rate cut from the Federal Reserve later in 2024.

Enjoy your weekend and here is to a solid week in the markets this coming week.