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Positive response by markets and pound

£2.3 billion added to bank values following Tory election victory

CityFinancial markets responded positively to the outright victory for the Conservative Party, lifting any lingering gloom that had weighed on traders in the expectation of a hung parliament.

The FTSE100 stock rose 1.7% this morning to surge back through 7,000 and sterling was on course for its biggest daily rise against the euro since 2009. The cost of UK government borrowing fell.

Jonathan Bell of Stanhope Capital said: “As far as markets are concerned it is good news. A Conservative victory is preferable over a Labour-SNP coalition and that’s why we see sterling and UK equities higher.”

Banks, utilities and housebuilders were beneficiaries of the Tory victory with £8.5 billion added to the value of the five biggest UK banks and the taxpayers’ stakes in RBS/Lloyds worth 2.3 billion more.

Markets have enjoyed a good start to the year and will be delighted that the outright majority removes the need for horse-trading over forming a government. Last month, the FTSE hit a record high of 7,122.74 points and some believe it will now go higher as the economy picks up and investment in the economy resumes. The FTSE 250 mid-cap index hit a record high of 18,161 points.

Sterling was up 2% against the euro, pushing the single currency down to 72.40p putting sterling on course for its biggest one-day rise against the single currency since early 2009. The pound rose above $1.55 for the first time since late February.

The benchmark 10-year yield on UK government bonds fell as much as 13 basis points at the open to a one-week low of 1.79%.

David Lamb, head of dealing at the forex specialists FEXCO, said: “While the City is pro-Tory by default, today it is cheering a victory for continuity as much as for the Conservatives.

“After weeks of jitters, the relief was palpable on the currency markets – with the pound surging in early trading against both the Dollar and the Euro.

“With the polls predicting a range of awkward scenarios – including endless variations of coalition – a clear win for the status quo was the best the markets could have hoped for.

“While the Conservative pledge to hold an EU referendum by 2017 will be a longer-term source of concern, for now the bulls are running riot – and the UK’s robust economic position is firing demand for Sterling that could push the Pound even higher.”

Dominic Rossi, Global CIO of Equities at Fidelity Worldwide Investment, said: “Whilst the constitutional issues raised by the election result will cast a shadow over Westminster, markets will be relieved that a likely conservative majority will continue with its fiscal consolidation policies combined with a competitive corporate tax policy. We expect equity markets and the FTSE 100, which surpassed a record high in April, to continue to trend upwards.”

Andrew Wells, Global CIO of Fixed Income at Fidelity Worldwide Investment, said: “On the face of it the swing to the Conservative party, and the possibility of a majority, albeit slim, will probably be positive for both sterling and gilts.

“However, as the dust settles the change in Scotland will have to be closely followed. Whilst the Scottish Nationalists did not campaign on a ticket of devolution, the magnitude of support for them must herald change in the future, and this will cause greater uncertainty.

“The other danger is that a slim majority, with no significant coalition could always see us back at the polls in a short period of time and markets will be wary of that situation.”

The election result was followed by robust employment figures from the US which helped give markets another reason to cheer.

 Marcus Bullus, trading director at MB Capital, said: “The bulls are back on both sides of the Atlantic.

“A stunning return to form for US jobs growth and a surprise victory for the status quo in the UK election have sent stocks skyward in both New York and London.

 “With the US unemployment rate now at its lowest level since May 2008 and rates of job creation rebounding, the first quarter wobble increasingly seems just that – a brief interruption in the US economy’s extraordinary run of job generation.

 “All of which points towards an economy with sound fundamentals, and opens the door to the Fed hiking interest rates sooner rather than later.

“Gains have been even greater in London, where markets had been subdued on fears of an inconclusive election result. While the City is pro-Tory by nature, traders have been celebrating a victory for continuity as much as for the Conservatives.

“With the threat of a hamstrung coalition over, the Pound is surging and UK equities are bouncing back.

 “The “special” relationship between the two countries may be increasingly less special, but both have economies that are firmly back on song – and such positive news has fired up the bulls in both.”

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