Markets react to elections

Markets have been watching elections in recent days. The UK election produced a Labour government with a large majority, as expected. Markets took this well – looking forward to greater certainty of policy and direction.

The second round of the French election confounded the pollsters by putting the left Popular Front in first place instead of in second, and putting National Rally third, not top. Commentators had been right to say none of the three-party groupings would win a majority, leading to more political uncertainty. There will be difficulties in forming a new government and in meeting European Union (EU) requirements to reduce the budget deficit. President Marcon’s coalition lost seats, leaving it in a weaker minority position.

In the US, despite strong support for President Joe Biden from his family and close political associates, there is still Democrat talk of asking him to stand down so they can find an alternative candidate to oppose Donald Trump. In both France and the US, political uncertainty has risen.

The UK election

The UK election produced a very strong majority for Labour, winning seats in all parts of Great Britain. There has been buy-in to the new government’s wish to boost the growth rate and increase economic stability. The voting pattern was, however, less reassuring for Labour.

Compared to the 2017 election, the Conservative vote halved as many former Conservatives stayed at home or voted Reform, whilst the Labour vote fell by 3.1 million as their former voters stayed at home or switched to other left-wing parties. The prime minister’s own majority in his seat halved as a pro-Palestinian independent took many votes.

The two main parties saw their combined vote share fall from 82% in 2017 to 58% this time. Traditionally a party winning a majority in the UK needs more than 40% of the vote, but Labour did it with 34%. The table beneath compares the 2017 and 2024 voting patterns.

Turnout in 2024 was well down, at 60%, with many voters not liking the varied party choices on offer. The new government will be aware of the political situation. It now has a large number of new seats to defend on small majorities in areas where Labour did not usually do well. The outgoing Conservative government found it difficult balancing the wishes and needs of its longstanding ‘blue wall’ seats in the south with the aspirations of its 2019-acquired ‘red wall’ seats in the north.

Labour has a similar problem, with some of the new seat voters not wanting homes and wind farms built in their areas whilst the national policy is to go for investment with new homes and green-energy-led growth.

The French election

Whilst many UK voters were turned off voting as turnout slumped, in France the three-way stark choices between National Rally, Ensemble and the Popular Front galvanised more to come out and vote. The result revealed a country split three ways, with around a third each.

The National Rally grouping wanted VAT cuts on energy, strict controls on migration and a reversal of the Macron pension reforms. The left-wing Popular Front wanted price controls on energy and food, an increase in the minimum wage, a reversal of the pension changes, and a larger civil service to allow the state to play a bigger role. Ensemble wished to reduce spending to hit EU deficit targets, to keep the higher age to qualify for pension and to be a mainstream EU friendly government.

President Macron can stay in office until 2027 – but cannot run again. As president, he has considerable independent powers over foreign policy and defence but must work with the prime minister and majority in the National Assembly. Trying to find a prime minister who can build a majority from such a split of party groupings is not going to be easy for anyone.

Markets would like a prime minister to emerge who can get sufficient support to govern in sympathy with the president and the EU budget requirements. Maybe someone can detach the Socialists from the Popular front, as they are less radical than the leading party of that alliance, France Insoumise. Maybe the Republicans, the old conservative party of France, will assist. Maybe they will proceed vote by vote, conscious that whoever is prime minister can be brought down at any time, as he or she will lack reliable support.

The left-wing alliance currently has the strongest position as it topped the polls between the three main groupings, but have no obvious new allies to go into coalition. The dominant France Insoumise is, so far, refusing compromises in its platform.

The US Presidential race

There have been only a few senior Democrats willing to say on the record they want President Biden to retire on health grounds, but the noise in the media has still not died down over whether he should continue his race for a second term. He is entitled to run by the results of the primaries and the rules of his party. Since the unfortunate debate which aroused the issue, the president and his team have been active putting out material and getting him interviews and events to demonstrate he is up the job and has a hunger for it.

There seems to be agreement that it would need Mr Biden himself to want to stand down to be able to undertake the process of moving to a new candidate with minimum damage. There remains the issue that the front runners to take on the candidature do not show ahead of Donald Trump in the hypothetical polls some are undertaking. Anti-Biden Democrats are seeking to keep the two decisions overstep down and a new candidate separate. They say let’s settle the question first of his capacity to do the job then go on to choosing someone else. Other Democrats say that the main point is whether Mr Biden can beat Donald Trump – so it is relevant to ask if anyone else can do this before asking him to step aside.

Those who want him to go, point out that vice president Kamala Harris would be the easiest substitute, as she is running on a joint ticket and raising money already. Others think she is not suited for the job of president and are put off by any suggestion that Mr Biden’s departure must be linked to a Harris candidature. Given the difficulties of finding and imposing a new candidate who could beat Mr Trump, these arguments are likely to run on. The Democrat Convention in August is the obvious last time to make a substitution.

Markets are still more swayed by central banks action – by how close we are to controlling inflation and by the impact of the digital revolution on business and growth. The US market has adjusted to the possibility that Mr Trump could win the election and could live with most substitutes for Mr Biden if Democrats do persuade him to make a change.

The French bond and equity markets will be affected by what government emerges and how successful it can be at controlling the debts and deficit. French bonds will need to offer more interest than German ones whilst these uncertainties persist. The UK now has a government with power to make changes to promote growth. Markets will respond favourably if they use these powers sufficiently to make a difference.