Live Markets: Local elections bring added risk to British markets

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LOCAL ELECTIONS BRING ADDED RISK TO BRITISH MARKETS

British local elections very rarely register on investors' radars but next week's vote (May 7) is one that markets cannot ignore, according to Jefferies economist Modupe Adegbembo.

"A weak local‑election outcome for Labour...would likely refocus markets on leadership risk and fiscal pressure," writes Adegbembo.

"In our view, this would push UK political risk premia higher, with the most visible impact at the long end of the gilt curve."

Gilts have sold off since the start of the Iran war, with Britain's 10-year bond yield GB10YT=RR closing above 5% for the first time since 2008 yesterday. The 30-year yield GB30YT=RR is up about 65 bps compared to its pre-war level.

Cross-market, Adegbembo expects any repricing of political and fiscal risk to lead to relative weakness for gilts versus German bunds and U.S. Treasuries.

In equities, the domestic-oriented FTSE 250 .FTMC could underperform, while in FX they favour shorting the pound against the euro EURGBP=.

     "Political uncertainty compounds an already fragile macro backdrop, and we see scope for sterling to underperform as leadership risk and fiscal concerns resurface," Adegbembo says.

(Samuel Indyk)

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