Sunak announces UK election

Sunak announces UK election

Sunak announces UK election- political gamble

Prime Minister Rishi Sunak announced the UK will hold a general election on Thursday, 4 July. Mr Sunak’s decision to hold a snap contest this summer represents a major political gamble, with the Tories currently lagging well behind the Labour Party in the opinion polls.

Addressing the nation in Downing Street, soaked by the afternoon rain, Mr Sunak said that “now is the moment for Britain to choose its future”.

2024, An Election Year – Cosmos Currency Exchange


Currency Exchange Rates Update: Pounds rally.

The financial markets gave a cautious welcome to the announcement of the earlier than expected UK election.

The currency markets thinking is that the 4 July vote removes any outside chance of a June rate cut from the BoE (Bank of England), potential giving the Pound Sterling’s rally another boost.

The stock markets thinking is that the announcement could boost the FTSE 100 as the markets seem relaxed about the prospect of a Labour victory the polls suggest is coming.

The odds of a June BoE rate cut have plunged from 50% to 10%. An August cut is looking more likely.

The Pound’s rally has taken it to its highest level against the Euro since July 2022; against the US Dollar since March 2024; against the Canadian Dollar since March 2021 and month to date high’s against both the Australian Dollar and the South African Rand.

What’s in the news?

UK Election: Five reasons

Five reasons why Sunak decided on an early election: –

  1. Good news on inflation: falling
    UK inflation hit 11.1% in October 2022.
    It has since fallen to 2.3%.
  2. No money to cut taxes; Borrowing overshoot
    The UK government’s larger than expected borrowing overshoot in April appears to rule out the possibility of introducing tax cuts in an Autumn budget.
    The ONS (Office for National Statistics) reported the difference between government income and spending last month was £20.5bn, £1.2bn more than forecast by both the (OBR) and economists’ expectations.
    The IMF (International Monetary Fund) has also weighed in, saying further tax cuts would also complicate the public finances.
    Rob Wood, chief UK economist at Pantheon Macroeconomics, simply noted “there isn’t room for tax cuts”.
  3. Avoid a summer of small boats; uptick in crossings
    One of Sunak’s five pledges was his promise to stop the small boat arrivals across the Channel.
    The announcement of the election on 4 July could see the government avoid the best part of two months of potential good weather, calm seas and an uptick in attempted crossings.
    Sunak also said earlier this month that the first flights deporting asylum seekers to Rwanda could take off in June, which could also offer a helping hand in an election campaign.
  4. Polls aren’t budging; labour ahead
    Labour have been consistently ahead in the polls since 2022, and currently boast a 21-point lead according to Politico’s ‘poll of polls’.
    The political argument for calling an early election is that it may be better to get the worst over with and focus on rebuilding the party in opposition.
    The political argument for waiting until November is that you never know when something may come along and turn things around.
  5. Voter base: more rural
    The Conservative’s main voter base tends to be older, and more rural than Labour.
    There is concern at Conservative Central Office that the party could lack activists on the doorstep in dark, cold, rainy winter months, especially after a dire set of local election results lost hundreds of councillors.
    A November election may also coincide with the beginnings of an NHS winter crisis.

Good news: UK exited the recession & most attractive European investment destination

According to the ONS, the UK economy exited last year’s technical recession with above expectations growth of 0.6% in the first quarter of 2024.

The ONS reported that UK inflation cooled to the lowest level in nearly three years in April, down from 3.2% in March to 2.3% in April.

While the figure is much closer to the BoE’s inflation target of 2%, it is still higher than what economists expected, who thought it would come in at 2.1%.

Linda Ellett, UK head of consumer, retail and leisure for KPMG, said: “Inflation is slowing and the mood music for the UK economy is getting more upbeat. But gradually increasing confidence levels are yet to translate into a notable uplift in discretionary spending, generally. Over the coming weeks, retail and hospitality businesses will be hoping that purchases related to healthy summer holiday demand, combined with Euro 2024 and hopefully some sunshine, provide a stimulus for increased summer spending.”

According to a new survey from EY (Ernst & Young), the UK has extended its lead as Europe’s top destination for investment in financial services.
The UK attracted 108 financial services projects last year, up from 76 in 2022 and well ahead of European rivals. France, in second place, secured just 39 foreign direct investment (FDI) projects in 2023.

This means the UK is now home to a third of all European FDI projects focused on financial services, up from 26% in 2022. France and Germany are tied in second place at 12% each.

Anna Anthony, EY UK financial services managing partner, commented “The UK didn’t just maintain its lead as the most attractive European financial services market last year, it extended it significantly. Even through challenging macroeconomic conditions and geopolitical uncertainty, the stability of the UK’s financial services sector has ensured foreign investor confidence remains strong.”

The figures show that London remains Europe’s leading financial hub.

GfK’s consumer confidence reading came in at -17 for May, an improvement from -19 in April and -21 points in March.

The figure is up by ten points when compared to exact same period the year before, as cooling inflation improves consumer sentiment.
GfK’s major purchase index, which takes the temperature on the likeliness of UK residents making large purchases also rose by one point to -26 after also rising in the previous month.

Joe Staton, client strategy director GfK, said “With the latest drop in headline inflation and the prospect of interest rate cuts in due course, the trend is certainly positive after a long period of stasis which has seen the Overall Index Score stuck in the doldrums. All in all, consumers are clearly sensing that conditions are improving. This good result anticipates further growth in confidence in the months to come.”

Not so good news: on hold for 798yrs

The FCA (Financial Conduct Authority) has fined HSBC £6.2m over failures in its treatment of customers who were in arrears or experiencing financial difficulty.   

The FCA added that deficiencies in HSBC’s policies, procedures and staff training meant it sometimes took “disproportionate action” when people fell behind on payments, which risked them entering greater financial difficulty.

The fine, originally £8.97m, was reduced by 30% as HSBC agreed to settle the case and took action to resolve the issue.

The FCA’s penalty relates to failings between June 2017 and October 2018.

Therese Chambers, enforcement co-head at the FCA, said “People must be able to trust their lenders to treat them fairly when in financial difficulty. By failing to do so, HSBC put 1.5m people at risk of greater financial harm. It deserves credit for identifying the issue and putting it right. The cost it has incurred in doing so, however, should be a warning to all lenders that they need to understand their customers’ circumstances so as not to make a bad situation worse.”

The NAO (National Audit Office) has issued its report card for HMRC. In addition to failing to deliver on customer service and responding to telephone calls and letters, the NAO has measured and totted up and has concluded that between 2022 and 2023 HMRC kept customers on hold while waiting for their calls to be answered for a cumulative 798 years.

Capital Economics reported that record levels of immigration has driven a third of the UK’s rental cost growth since Covid. In the two years to June 2023, immigration led to an additional 430,000 households wanting to privately rent homes, meaning rents have climbed 11% higher than they would otherwise have been.

Rents typically rise roughly in line with wages, but since 2021 rent growth has far outpaced salary increases.

The ONS reported retail sales fell by 2.3% in April, a much worse fall than predicted by economists. The fall was blamed on the poor weather in April.

USA: Inflation faster than expected .

The US dollar is on track for its worst month of the year, rising against less than 20% of its global peers.

The FOMC (Federal Open Market Committee) left US interest rates unchanged at 5.25%-5.50% during its last meeting and Chair Jerome Powell ruled out further rate hikes, which sent the dollar tumbling.

The faster-than-expected inflation readings in the first quarter, particularly in housing costs, shook Fed officials’ confidence levels.

US inflation edged down to 3.4% in April, in data released a day after the FOMC warned it may have to keep interest rates higher for longer to tame price pressures.

Higher for longer – business economy interest rates

David Solomon, Goldman Sachs Group Chief Executive Officer said he expects the Federal Reserve won’t cut interest rates this year given a US economy that’s proved quite resilient.

According to the University of Michigan, US Consumer Sentiment Index is at a 6-month low at 67.4 in May 2024 as US consumers are worried by the prospect of a rise in unemployment and an increase in the cost of living, driven by stubborn inflation which so far has refused to drop below 3% and is expected to stay above that level.

President Joe Biden has blocked the release of audio recordings of his interviews with the special counsel who investigated his handling of classified documents.

The EU: level of confidence

Christine Lagarde, ECB (European Central Bank) President, stated yesterday that the council is “really confident” inflation is now under control, displaying a level of confidence that other central banks are currently unable to match. This sentiment is likely to keep the Euro under pressure until an expected reduction in borrowing costs in June.

As the interest rate policy divergence between the UK, US and Europe increases, we are likely to see the Euro remain under pressure.

In France, over 50’s have an unemployment rate of 5.1% while the rate for those under 24 is 18.1%. This statistic does not augur well for the future of France’s economic performance.

Others: gold demand

The price of gold hit an all-time high on 20 May.

There are three main reasons for this.

First, the amount of gold bought by the world’s Central Banks in recent months. Second, the huge demand from China as holders of Yuan remain fearful of a China government intervention to devalue its currency, and lastly the already present geopolitical fears which were exacerbated this week by the death of Iran’s President and the succession vacuum to Iran’s leadership caused by that wholly unexpected event.

Quote

“People never lie so much as after a hunt, during a war or before an election”, Otto von Bismarck, Germany’s first Chancellor.

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