Why Britain’s potential next PM is putting investors on edge
LONDON, ENGLAND – JULY 9: British Prime Minister Sir Keir Starmer hosts the first roundtable of English regional mayors with Mayor of Greater Manchester Andy Burnham (R) at Downing Street on July 9, 2024 in London, England. Sir Keir Starmer hosted the first roundtable meeting with metropolitan mayors from 11 regions across the UK. (Photo: Ian Vogler – WPA Pool/Getty Images)
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LONDON — U.K. gold and sterling have come under increasing pressure amid fears that a new left-leaning prime minister will challenge the country’s fiscal discipline and take a confrontational stance on bond markets.
Investors were reacting on Friday as hurdles to a challenge to Keir Starmer’s premiership by Labor rival Andy Burnham were removed and selling pressure intensified.
It comes after US President Donald Trump told reporters it would be “difficult” for Starmer to survive politically without dealing with key issues such as immigration and energy policy.
Burnham, who is currently Mayor of Greater Manchester but is not a sitting MP in the UK parliament, was pitched in the House of Commons on Friday a new route that could speed up his route to 10 Downing Street.
He is set to stand as a candidate in the by-elections to be held in Makerfield, in north-west England, after MP Josh Simons stepped aside and allowed Burnham, nicknamed Labor’s “King in the North”, to stand in the election.
An earlier bid by Burnham to stand in the by-election in January was blocked by Starmer loyalists in a bid to prevent a challenge.
Now, with Starmer under intense pressure to resign following the ruling Labor Party’s disastrous performance in last week’s local council elections, Burnham’s victory in the poll against the ascendant right-wing Reform Party could boost her bid for the prime ministership.
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The looming prospect of Britain under Burnham’s leadership is now making investors nervous.
Manchester mayor blasted last year The UK government has been accused of being “hostage to the bond markets”.
Investors also fear a more left-wing policy program that would break the current government’s commitments to fiscal restrictions, including £40bn of additional borrowing for housing and infrastructure spending and higher taxes on expensive homes in London and the south-east of England.
GBP/USD.
British pound It fell to a one-month low against the dollar on Friday and has continued its decline over the past week as a challenge to Starmer gains momentum. Sterling was last trading down 0.3% against the dollar at $1.3363 during morning trading.
Meanwhile the return 10 years of Gilded The benchmark for UK government debt remains well above 5% and rose more than 1 basis point to 5.137% on Friday.
Elias Haddad, global head of foreign exchange market strategy at BBH, said a Labor government led by Burnham was likely to lead to more spending and borrowing.
“Political uncertainty will continue to dominate price action in GBP and gold, with bias to the downside given the deterioration of the UK’s financial credibility,” Haddad said in a note on Friday. “The UK’s nominal GDP growth is running below 10-year yields, making it very difficult to stop debt growth.”
Haddad suggested that in recent polls, 61 per cent of Labor Party members would support Burnham, while 28 per cent would support Starmer.
Prediction betting market Polymarket also ranks Burnham as by far the most likely next British prime minister; There is a 42% chance of Starmer keeping his job compared to just a 27% chance of his former deputy Angela Rayner taking over.
Political ‘psychodrama’
Burnham partially walked back some of his comments on bond markets last year, Deutsche Bank analysts said, highlighting his comment in February that they should not be ignored.
But Neil Mehta, macro portfolio manager at RBC BlueBay, believes the Labor government is on track for a decisive leftward shift that will impact markets and assets.
UK 10 Year Gilts.
“The next Labor leader is likely to come from the left of the party and, in an environment of uncertainty, UK financial assets and the pound sterling are likely to be exposed to a high political risk premium for an extended period,” Mehta said.
Meanwhile, House of Lords member and former diplomat Peter Ricketts suggested that a new round of what he called the “Westminster psychodrama” would damage Britain’s reputation and international influence.
“Keir Starmer will be less effective as a leader in Europe in resolving the Ukraine and Iran crises if he fights for his job at home,” Ricketts said. “If the EU doesn’t know who will be prime minister in a few months, it will be less interested in negotiating a much closer relationship with the UK.”
