Saturday, May 7, 2005

British pound falls, stock market up on election result

By Jane Wardell / AP Business Writer

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LONDON -- The London Stock Exchange pushed higher Friday while the British pound fell against the U.S. dollar after Tony Blair's Labour Party won a record third term in government -- but with a much-reduced majority that could strain the prime minister's authority.

Economists said the election result was broadly in line with forecasts ahead of Thursday's vote and there was relief that the vote had not resulted in a situation where no party had a majority in the House of Commons.

"The one thing the market hates is uncertainty and the worst scenario would have been a hung Parliament, but we are not in that area," said Richard Hunter, head of equities at Hargreaves Lansdown. "There's probably a slight sigh of relief that it's business as usual, but a result like this has been factored in for a while now."

The leading FTSE 100 Index gained 0.3 percent to 4,918.9, after beginning the session slightly lower. The index has enjoyed a rally in the past week, recovering lost ground to post five positive sessions and leave it at its highest level since mid-April.

Economists said the negative aspects of Friday's result was reflected more clearly in the currency markets, where the pound dropped against the U.S. dollar.

Investec chief economist Philip Shaw said dealers were reacting to Labour's smaller majority and the prospect that members on the party's fringes will hold more sway over Blair. Analysts said the election had provided an immediate reason to sell sterling, supporting an underlying belief it is increasingly overvalued as economists agree that the British economy has reached its peak.

The pound was at $1.893 in late trading, down from $1.9048 late Thursday in New York. The pound also initially fell against the euro, but picked up against the European common currency during the day. The euro was trading at 0.6778 pound, down from 0.6796.

Blair weathered a backlash over the Iraq war to win a third term as prime minister, but his party's majority in the 646-seat House of Commons was slashed by almost 100 seats -- a situation that could weaken his mandate.

Blair acknowledged the setback and appealed for unity.

"Iraq has been a divisive issue in this country but I hope now that we can unite again and look to the future there and here," he said early Friday, after keeping his seat in his home constituency of Sedgefield.

Financial markets had already factored in the drop in the government's majority, predicting a figure of around 70 seats.

The British Broadcasting Corp. projected Labour would win 66 more seats than all the other parties combined. Sky News put the Labour majority at 64 seats. Official results for the remaining seats were expected to trickle in through the weekend.

Shaw said the currency markets appeared to be looking ahead to a potential rougher ride for the government, with business tax increases likely to meet the government's fiscal rules.

"The domestic economy is cooling, we are beyond the peak of the global economic cycle, while world markets will have to deal with the potential consequences of large imbalances such as the U.S. current account deficit," Shaw said. "This provides a tricky backdrop to the already difficult issue of fiscal policy."

Jonathan Loynes, chief U.K. economist at Capital Economics, said taxes are likely to rise in the spring 2006 budget -- following decisions by Treasurer Gordon Brown to raise taxes in the first budget after each of the last two Labour election victories.

"We expect a rise of around 10 billion pounds ($19 billion) a year, which supports our expectations of sluggish economic growth and low interest rates next year," Loynes said.