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Downside risks to both gilts and sterling FX from the UK election (2/2)

UK
  • Similarly a large majority of 150+ could potentially see an adverse market reaction. A majority this large may be seen as a stronger mandate for a bigger shift towards more socialist policies. Furthermore, Starmer and Reeves have already said they expect to boost growth to fund their spending increases, but it is difficult to boost growth in a non-inflationary way. So the prospects of higher inflation are likely to weigh on gilts in particular. Furthermore, if the growth plan doesn't work out, spending could increase substantially leading to higher debt levels (and higher future issuance). Interestingly, this is exactly what the market was worried about with Truss as PM.
  • A majority of around 75-130 is probably the most positive outcome for the market - but is already probably close to being priced in. In this scenario Labour would have a large enough majority to not be held hostage by a small number of hardliner MPs but would also not have such a sizeable majority to encourage Starmer and Reeves to leave the middle ground.
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