Labour landslide

Any residual concerns that the market may have had over the reality of a change in government appear to be lessening as the new administration strives to prove there is more to “New Labour” than just a name.

EQUITY MARKETS

Even the huge margin of Labour’s victory failed to unsettle the UK market as it continued to participate in the worldwide equity rally. Perhaps the only cloud on the horizon is the possibility of significant adverse changes to corporate taxation in Gordon Brown’s first Budget.

LABOUR BOOST TO GILTS

Labour’s decision to hand control of interest rate policy to the Bank of England has had an immediate impact on gilts. Yields have fallen by 0.4% as the market has taken a more sanguine view on the long-term inflation outlook. This has caused a narrowing in the differentials between UK and international bonds. If the Budget, expected mid-June, is as cautious as we expect, then there is scope for spreads to reduce still further.

SECTORAL ACTIVITY

Growth in manufacturing production has suffered because of sterling strength and a lack of growth in Continental Europe. However, there are signs that growth in Europe is improving and we do not expect sterling strength to continue.

OVERALL SUMMARY

US economic growth should rise significantly over the medium term if left alone. However, higher official interest rates and bond yields should prevent growth from exceeding 3%. First quarter growth in Japan was strong, although it remains questionable whether this is sustainable.

The Tankan survey would suggest this is the case and we share this optimism and expect growth to become self-sustaining over the next three to six months.