September 11, 2015 / 3:52 PM / 4 years ago

Markets twitchy as socialist Corbyn set to lead Labour

LONDON (Reuters) - Markets usually pay little heed to opposition party leadership elections, but the emergence of hard-left Eurosceptic Jeremy Corbyn as the frontrunner to head Britain’s Labour party is making investors twitchy.

The key concern is that a victory for Corbyn, even if he were never elected prime minister, could increase the risk of “Brexit” — a British vote to leave the European Union in a referendum pledged by the end of 2017 but which may come as soon as next June.

Brexit fears have already pushed the cost of hedging against big swings in the sterling/dollar exchange rate to the highest since May’s national election. Analysts hesitate to blame the rise on the Corbyn factor but say that if he is unveiled on Saturday as Labour leader, the cost could rise further.

Moreover, strategists say victory for Corbyn, who calls for renationalisation of the railways, postal services and energy networks, could pressure the centre-right Conservative government to take a tougher stance on utilities.

“It’s the first time that I can remember that an opposition party leadership campaign has had an impact on the market, and has caused interest globally,” said Morgan Stanley’s European head of FX strategy, Ian Stannard, highlighting Corbyn’s views on the EU as the main focus for investors.

“It’s always been widely assumed that the opposition parties would be supportive of staying in Europe, but that assumption could be called into question,” he said.

While all three of the other candidates have taken a pro-European stance, Corbyn has demanded socialist reforms before pledging the party’s support for staying in the European Union. He told Reuters on Thursday he had voted ‘No’ to Europe in a 1975 referendum.

Corbyn’s surge in popularity over the past two months has coincided with a period of heightened volatility in markets, dominated by worries over Chinese and global growth. This makes isolating the Corbyn factor complicated but investors are starting to look at the looming political risks in Britain.

Some reckon the exchange rate is already reflecting Brexit jitters.

“The overall risks facing Brexit over the course of the next 12 months are already exerting a cap on sterling,” said BMO Capital Markets’ head of FX strategy, Stephen Gallo.

The cost of hedging against big swings in sterling’s exchange rate against the dollar over the next two years rose to 8.65 percent in late August, its highest since the May elections, and has remained elevated as investors seek protection against volatility in the run-up to the vote.

CORBYNOMICS

An admirer of Karl Marx, Corbyn’s ideas on “People’s Quantitative Easing”, which would see the Bank of England create 50 billion pounds ($77 billion) per year to fund public infrastructure projects, have been criticised by many in financial markets as undermining BoE independence and a potential source of inflation.

On Thursday evening Corbyn took aim at the Royal Bank of Scotland, saying he would introduce a punitive windfall tax if he became prime minister in 2020 to recoup money lost by privatising state assets too cheaply.

Bank of Tokyo-Mitsubishi UFJ’s European head of global markets research, Derek Halpenny, said although markets doubted his ideas would ever come to fruition, Corbyn could put Cameron under pressure on popular measures such as energy price caps.

“It may force the Tories to be a little bit tougher with the utility companies ... so in that perspective (a Corbyn victory) might be a negative for utility companies,” Halpenny said. He said that could be reflected in those firms’ stock prices on Monday, though it would only be a modest, temporary adjustment.

However, analysts say markets’ view of Corbyn is tempered by a conviction that he would never be elected prime minister and that prices reflect that.

“The well-held view is if he became the leader of the Labour party then it wouldn’t be able to win a general election - that’s the way the market is pricing it in,” said Insight Investment fund manager Paul Lambert.

“If in six months’ time he’s the leader of the Labour party and the Labour party is 15 percent ahead in the polls, then the market will take notice.”

Reporting by Jemima Kelly; Additional reporting by Alistair Smout; Editing by Giles Elgood

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