Key Takeaways
- Bond markets are pricing in higher UK government spending and borrowing under a potential new Labour leader.
- FTSE 100 slides as banking stocks react to fresh domestic political uncertainty.
- The government is due to set out its policy agenda in the King’s speech on May 13.
UK government bond yields rose sharply on Tuesday following calls from Labour MPs for Prime Minister Keir Starmer to resign.
At least 80 Labour MPs have called for the leader to step down following last week’s disastrous local election results for the Labour Party; 81 signatures are required to force a leadership contest.
In a Cabinet meeting this morning, Starmer vowed to continue as Labour leader. Three ministers, including safeguarding minister Jess Phillips, have resigned from their positions in Starmer’s Cabinet and called for the leader to stand down.
The dissenting Labour MPs are also said to include Foreign Secretary Yvette Cooper and Home Secretary Shabana Mahmood, reports say.
The 10-year UK government bond yield rose to 5.12% on Tuesday, a 0.12 percentage point rise, the highest level since the 2008 financial crisis. The yield on 30-year gilts hit 5.78%, a level last reached in 1998. Similar moves were seen across government bond durations.
The FTSE 100 fell 0.6% to 10,200 points, with banking stocks under the most pressure, while the pound weakened against the dollar to USD 1.35, from USD 1.36 the day before.
“The move reflects growing market concern that increased political instability could cloud the outlook for fiscal policy and weigh on investor confidence in UK assets,” says Chris Cheverall, CMC Markets head of UK.
Political Turmoil Rattles UK Markets as Pressure Mounts on Starmer
Labour lost over half their local councilors in the May 7 elections, leaving the party with 1,068 representatives at local government level as support for Reform UK surged.
The government is currently scheduled to set its agenda for the coming year in a speech delivered by the King tomorrow.
The prime minister has vowed to stay on and fight any leadership challenge he might face, while he set out plans to align the UK more closely with Europe and nationalize the UK’s steel industry as part of a “reset” speech on May 11.
Oil Prices and Iran Tensions Deepen Strain on UK Assets
Derren Nathan, head of equity research at Hargreaves Lansdown, says some of the market movement can be attributed to higher oil prices amid continued diplomatic deadlock between the US and Iran.
“Back at home, rising government borrowing costs aren’t helping either, with prime minister Sir Keir Starmer’s leadership under increasing pressure,” says Nathan. “The potential for a fiscally looser successor may be weighing on rate expectations, but the inflationary influence of higher-for-longer oil prices is likely to be the bigger driver. With 10-year gilts now paying just over 5%, any movements in the yield will be closely monitored.”
Chris Beauchamp, chief market analyst UK at IG, says there is no clear plan for what comes next, though markets are pricing in a new leader who will increase government spending.
“Faced with hordes of Labour MPs worried about their reelection chances as Reform surges, a new PM will find it very hard to resist calls to spend more money in order to shore up their embattled party,” Beauchamp says. “Much of the case for the UK as an investment destination rested on the Starmer/Reeves commitment to fiscal rectitude, but it is unlikely that a new leader from the left of the party would feel bound by such promises.”
