Markets Warm to the Idea of a Labour Takeover in the UK

Markets Warm to the Idea of a Labour Takeover in the UK

The risks attached to a “no-deal” Brexit are testing the age-old assumption of “Tories Good, Labour Bad.”

SourceDANIEL LEAL-OLIVAS/AFP/Getty

Why you should care

Because the financial markets are taking an unexpected left turn.

Markets are warming toward Jeremy Corbyn.

Yes, you read that right. In a sign of just how unpredictable United Kingdom markets have become, analysts are starting to believe that the die-hard socialist leader of the Labour Party could be just what sterling needs in this, its darkest hour.

The country is certainly putting investors through their paces with a series of political shocks and confusion, taken lately to a new level by plans for a general election and plans to suspend Parliament. By comparison, the shake-up in U.K. markets when the 2010 election produced a hung Parliament now looks like a twee outbreak of pearl-clutching.

“With the U.K.’s autumn political storm breaking out in full force, this may prompt ‘peak uncertainty’ hopes.…  Investors might now look forward to the dust settling and knowing where we stand,” says Christopher Granville, managing director at TS Lombard. “The U.K. outlook is, instead, utterly imponderable.”

By removing further uncertainty, [Labour’s] support for either a softer Brexit or no Brexit at all would boost the economy in the medium term.

Paul Dales, chief U.K. economist, Capital Economics

An alarming flash crash a few months after the Brexit referendum sent the pound very briefly under $1.15, but this week’s nadir — just under $1.20 — has not been familiar territory for sterling since Frankie Goes to Hollywood took Welcome to the Pleasuredome close to the top of the U.K. pop charts. (That was 1985, for the forgetful or those too young to recall.)

U.K. manufacturing data earlier this week suggested that a feeble currency is doing little to lift the economy. So, how could Corbyn help?

To the extent that markets paid attention to U.K. politics over the bulk of the past two decades before the Brexit vote, the mantra has always, crudely, been “Tories Good, Labour Bad.”

“The markets wouldn’t be keen,” notes Paul Dales, chief U.K. economist at Capital Economics, “but if Labour came to power before Oct. 31 or after another Brexit delay, its opposition to a ‘no-deal’ Brexit would remove a near-term downside risk to the economy. And, by removing further uncertainty, its support for either a softer Brexit or no Brexit at all would boost the economy in the medium term.”

Oliver Harvey, a foreign exchange strategist at Deutsche Bank, broadly agrees. “Some market participants have expressed concerns that the election of  … Corbyn as prime minister could be negative for U.K. asset prices, particularly sterling,” he says. “We believe these fears could be overstated.”

Whatever the long-term implications for sterling, an ascent to power for Corbyn would likely mean “the pound would benefit if the risk of a ‘no-deal’ Brexit is removed and a closer U.K.-EU relationship looks more likely,” says Dales.

Already, the parliamentary drama that lines up the chance of a general election has helped boost sterling from its lows. It climbed 0.8 percent on Wednesday morning. New rules clearly apply.

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By Katie Martin

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