Pound, Shares Rally After Election Blues

London shares were slightly higher at midday on Friday and the pound rallied against the dollar after digesting the Labour partys emphatic win in Britains general election.

The huge election rout for Britains Conservative party, which had held power for 18 years, put Labour in government with a majority of about 180 seats.

Yet the early loss in the share market was less than many dealers had feared, with some arguing that the poll result had been been discounted and that the decisive poll outcome should ultimately prove positive for British markets.

The FTSE 100 index of top stocks, which set a record close on the eve of the poll, was up 4.6 points at 4,449.6 at 1100 GMT, defying overnight talk of an early 50-point drop, though it touched a low of 4,423.6 in early trade.

 

Sterlings weakness was a boon for many of the FTSEs large exporting companies whose earnings have been squeezed by the currencys strength in recent months.

Theres an argument that weve known Labour was going to get in for months, said a dealer at one major securities house, and now theyve got such a huge majority theres a degree of certainty so we could see the market go higher.

Utility shares, in line for Labours planned windfall tax, were among the biggest early losers and at midday United Utilities Plc

had extended its early losses and was down 20p at 649 and Thames Water Plc down 9-1/2p at 670.

Going in the other direction, British Telecommunciations was up 5-1/2p at 462, a near three-year high, with the stock whose executives have forged close links with Labour seen as a relative beneficiary of the new regime.

The big questions now are on the econonmy and taxation, policy towards Europe and the constitution, said a dealer at one broking house. There are some real minefields for them to negotiate and we shall have to wait and see what they do.

One of Labours first tests comes with next weeks planned monetary policy meeting, at which the Bank of England is expected to repeat its call for higher interest rates. Next month Labour is expected to deliver its first budget.

Labour has inherited an economy in good shape, the dealer said. The question is whether they can keep it that way.

British gilts fell in early trade but had rallied by midday when the long gilt future was up 7/32 at 111.0 having been as low as 110-05/32.

Sterling, too, had hauled itself off its earlier lows by midday when it stood at around 1.6100 to the dollar having been as low as 1.6008, compared with 1.6253 late on Thursday.

Sterling firmed against the dollar and mark overnight, but came under pressure in early trade when dealers cited a column in the Times newspaper which said Britains new government must create conditions for an immediate fall in the pound to avoid economic damage.

Share prices in Frankfurt and Paris were modestly higher at 1100 gmt, though many investors were on an extended weekend holiday following Thursdays May Day holiday.

In Paris, the CAC-40 index was 0.4 per cent higher at 2,650.70. In Frankfurt, the DAX index of leading shares was up 0.5 per cent at 3,455.62 points. Both were little changed from midmorning. But traders across Europe were circumspect ahead of the crucial US jobs report for April due at 1230 gmt, which will be scrutinised for signs that wage inflation will spur further U.S. interest rate rises.

The U.S. Federal Reserve central bank plays close attention to jobs figures in gauging inflation pressures. It has nudged rates higher once already this year to counter inflation and meets again to review policy on May 20.

The dollar drifted higher against the mark and yen at Europes midday ahead the U.S. data.

A Labour win had been fully anticipated, but the size of the partys majority caught many by surprise.

Although things have cooled down a bit, there was selling in sterling because people were afraid that with Labour free to do as it likes in government, there was some question as to whether it will do what investors are hoping for, said one senior dealer at a Japanese bank in London. Until we see some policy announcements and the cabinet line-up, theres going to be nervousness over sterling.

Regarding the dollar, analysts said strong payrolls data was unlikely to give the currency much of a boost, adding that weaker figures would have more of an impact.

STOCKS PRICES AT 1100 GMT

Londons FTSE 100 was up 4.5 points at 4,449.5. The Paris CAC-40 index was up 11.24 at 2,650.70. Frankfurts DAX index was up 17.55 points at 3,455.62.

CURRENCIES AT 1100 GMT

The dollar stood at 1.7255 marks compared with 1.7182 marks late in Europe on Thursday. It was at 126.85 yen after 126.57 yen late on Thursday.

PRECIOUS METALS

Gold fixed at $339.80 an ounce compared with Thursdays close of $340.80 in London.