Last Week In Review: A Financial Roundup
Monday
French Elections Stir Financial Markets with Immediate and Long-term Impacts
The recent French elections saw Marine Le Pen's National Rally initially lead, causing significant market fluctuations.?
French stocks surged with the CAC 40 index rising by 2.7%, and bank stocks saw a strong recovery. The euro also strengthened, hitting a two-week high against the dollar before experiencing a 0.3% decline by week’s end. Investor sentiment remains cautious due to concerns over potential political gridlock and its implications for economic reforms. While there was initial anxiety over a Le Pen-dominated government, the unexpected success of the leftist coalition has introduced new uncertainties.??
Despite the leftist alliance's likely failure to secure an outright majority, markets remain volatile, anticipating higher yields on French debt and instability in financial assets. Their proposed increases in government spending have raised alarms about France's budget deficit and compliance with EU fiscal regulations. Investors are cautiously optimistic but wary of long-term instability.?
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Tuesday
ECB’s Makhlouf Sees Only One More Rate Cut This Year, Reuters Says
European Central Bank (ECB) policymaker Gabriel Makhlouf expressed a preference for just one more interest rate cut this year, needing more time to ensure inflation heads towards the ECB's 2% goal.?
Investors are anticipating at least one, possibly two, more rate cuts by December, as inflation dropped from 10% in late 2022 to 2.5% last month. The ECB started reversing its significant rate hikes last month, but President Christine Lagarde indicated no rush to further reduce borrowing costs, noting slower progress ahead.
June data showed inflation in the eurozone's 20 countries slowed to 2.5% from 2.6% in May. Makhlouf welcomed this data but highlighted ongoing concerns with service inflation, which remained steady at 4.1% for the second consecutive month. He emphasised the importance of monitoring wage growth in the services sector and advocated for patience in evaluating further data.?
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Wednesday
UK investors buy record $14.5 billion of stocks this year, Calastone says
￡11.4 billion ($14.5 billion) was added into equity funds by British investors in the first six months of the year, driven primarily by expectations of further central bank interest rate cuts, according to Calastone.?
Global equity funds led the inflows in June, attracting ￡1.4 billion, while European equities saw ￡714 million. Despite this, North American equity funds experienced slight outflows, with UK equity funds also seeing continued, though reduced, outflows totaling ￡522 million, the smallest this year.
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This marks the highest half-year inflow in Calastone's decade-long records. In June alone, UK investors added ￡1.7 billion to equities, maintaining a robust inflow trend. Conversely, investors withdrew ￡471 million from bond funds in June, marking the second consecutive month of outflows, amounting to a two-month total of ￡1.1 billion.
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Thursday
Government should penalise UK start-ups that list abroad – City lobby group
UK Finance, a prominent lobby group representing over 300 financial firms, has urged the next UK government to impose penalties on start-ups that receive taxpayer-funded support but later choose to list or relocate significant operations outside the UK.??
This call comes amid increasing competition from overseas markets for company listings. The group suggested that government support for early-stage companies should come with a reciprocal commitment to the UK.
This recommendation follows a trend of UK firms favouring foreign exchanges like New York for IPOs, raising concerns about the potential relocation of jobs and operations overseas. Conor Lawlor of UK Finance highlighted the need for the UK to adopt more interventionist measures similar to those in the US and France, including possible tax penalties for firms that leave the UK after receiving state support.?
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Friday
Reeves faces daunting fiscal choices at helm of ‘pro-growth’ Treasury
Rachel Reeves, the new UK Chancellor, faces significant fiscal challenges as she aims to boost economic growth without resorting to deep cuts in public services.?
Taking office as the first female Chancellor, Reeves pledged to lead a "pro-growth" Treasury, supporting Labour's industrial strategy to revive investment. Despite recent economic growth, fiscal constraints are tight, with limited budgetary room estimated at less than ￡9 billion.
Labour is grappling with more optimistic growth forecasts from the Office for Budget Responsibility compared to economists' expectations, which could impact fiscal planning. Analysts foresee potential tax increases, such as capital gains or inheritance tax, as part of Labour's strategy to avoid austerity measures. Additionally, the Treasury's fiscal space could expand if the Bank of England reduces bond sales, potentially saving billions annually.
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