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Analysis

UK General Election :
Key markets to watch

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

Trading a General Election

The next UK General Election will take place on 4th July 2024. Traders active in UK markets – indices, stocks, bonds, or currency pairs involving the British Pound – could see increased volatility in the run-up to and aftermath of the election.

If past elections are anything to go by, the run-up may see small stock and sterling rallies, with the long-term effect of the election limited. But trading around elections is always uncertain, and news events can push UK assets in either direction. CFD traders active in British markets need to watch closely, as volatility creates opportunities for long and short trading as well as risks to open positions.

 

“With a sustained polling lead of 20% or more, there isn’t much doubt about the outcome of this election. That means markets are likely prepared for the eventual result.”

 

No surprises

The two governing parties in the UK, who have formed all or part of every government since 1915, are Labour and the Conservatives. Both are broad groups with different factions, but each is essentially a typical centre-left (Labour) and centre-right (Conservative) political party. Current polling indicates a clear Labour win, with the only question how large their victory could be. A combination of factors, including the addition of Nigel Farage to the right-wing Reform Party, means this election is likely to be catastrophic for the ruling Conservative Party.

 

Polling and markets

The first constituency-level polling at the end of May indicated they could be on course to win as few as 140 seats – down from 365 after the previous 2019 election. Since the Conservatives have governed the UK, independently or in coalition with the Liberal Democrats (a smaller centrist party) since 2010, this is a major change. So far there has been little to no market reaction, with a strong performance of both the FTSE100 and more UK-focused FTSE250 in the first quarter of 2024 slowing but not reversing. Traders can expect increased volatility as election day gets closer.

 

Are markets ready?

Predicting the UK election market impact is more complicated than it seems. With a sustained polling lead of 20% or more, there isn’t much doubt about the outcome of this election. That means markets are likely prepared for the eventual result. Even so, election day is likely to see peaks in volatility: key markets to watch for will be EUR/GBP, the FTSE100 index, and British bonds (known as ‘gilts’).

Historically, the Conservative Party has been considered more pro-business, and the FTSE100 tends to outperform in the twelve months following a Conservative victory. How a Labour victory might impact markets is less certain, with initial swings in sentiment likely settling down with time. But investors active in UK stocks, bonds, or the GBP need to be vigilant.

UK General Election: key markets to watch for traders

Traders are always on the lookout for volatility, and market movements are nothing to be afraid of. When markets move, trading opportunities open, and CFDs are uniquely powerful tools for going long or short in any market. That said, it’s important not to be blindsided by unexpected moves, and for traders active in election-influenced markets to use prudent risk management practices.

 

UK stocks

UK stocks will obviously be influenced by a change in government. Some sectors to look out for are railways, infrastructure, and major housebuilders. Labour has previously indicated it will try to stimulate housebuilding and nationalise the railways, causing likely gains in construction and losses in railways and railway infrastructure. Of course, simply talking about something is no guarantee it will happen, so expect corrections after any initial volatility. In the medium to long term, analysts expect the market reaction to be limited.

 

Forex: EUR/GBP and GBP/USD

Two classic UK plays for forex traders are EUR/GBP and GBP/USD. These both allow you to trade on the market’s confidence in the British economy, but each pair comes with complications given that 2024 is an election year in the EU and USA as well as the UK. The EU elections take place less than a month before the next UK General Election, so CFD traders looking to trade volatility from the UK election market impact must also consider any influence of that election on their positions. Since the US election takes place in November, the GBP/USD is perhaps a simpler way to share in the UK market volatility.

 

UK Bonds: Gilts

UK government debt is known as gilts. Gilt prices are normally expressed in terms of their yield, which decreases as prices increase. When gilt prices fall (yields increase), this is a sign markets are worried about the future creditworthiness of the issuing government. Since both parties have roughly similar fiscal policies, any potential rate cut or hike is more relevant to bond prices than the outcome of this election. CFD traders looking for volatility may be better served in the FX and stock markets than in UK bonds.

 

Conclusion: opportunities in volatility

Elections are normally good for volatility, creating long and short opportunities for CFD traders. Although the result of this election seems – for now – quite certain, the market reaction is always unpredictable. Traders active in UK markets should be prepared for volatility, especially in GBP forex pairs and the UK stock market.

FAQs

How might the UK General Election impact financial markets?

The next UK General Election on 4th July could significantly impact financial markets, with increased volatility expected in UK stocks, indices, bonds, and the British Pound. Historical trends suggest potential rallies in stock and sterling in the run-up, but outcomes can be unpredictable. Traders should be prepared for both long and short trading opportunities.

What is the likely outcome of the upcoming UK General Election?

Current polling indicates a clear victory for the Labour Party and could see a very substantial reduction in seats for the ruling Conservative Party. This result has been expected for some time and markets will not be surprised unless polling proves extraordinarily inaccurate.

Which markets should CFD traders watch during the UK elections?

Key markets to monitor include the EUR/GBP, FTSE100 index, and British bonds (gilts). While the Conservative Party has historically been seen as pro-business, the impact of a Labour victory on markets is less certain, requiring traders to be vigilant. UK stocks, particularly in sectors like railways and housebuilding, and forex pairs like EUR/GBP and GBP/USD, will likely experience volatility.


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