Key Takeaways
- Markets showed modest moves following Keir Starmer’s resignation as prime minister and leader of the Labour party.
- With Andy Burnham the current favorite to succeed Starmer, markets will watch policy announcements and political appointments closely in the coming weeks.
- Morningstar analyst Michael Field says the election of a more popular candidate like Andy Burnham would likely improve the perception of the UK from an investment perspective.
UK stock, bond, and currency markets showed muted reaction following Keir Starmer’s expected resignation as prime minister less than two years after the July 2024 election win.
Starmer announced his decision to step down Monday morning after weeks of pressure following the Labour Party’s poor local election results on May 7.
That pressure amped up further over the weekend following Manchester mayor Andy Burnham’s Makerfield by-election win on June 18, which triggered a drop in the pound from USD 1.34 to USD 1.32. Burnham is the current favorite to replace Starmer in the next few weeks.
There was little movement in UK stock indexes while government bonds were unmoved following the announcement as markets had already priced in the potential for leadership change following Burnham’s return to Westminster last week. The pound initially dipped against the dollar below USD 1.32 but then recovered as investors await a timetable for any potential leadership election. The 10-year gilt yield initially rose to 4.85% but then dropped back to 4.81%.
Michael Field, chief markets strategist for Europe at Morningstar, says the lack of a market reaction suggests that investors are broadly indifferent to the announcement.
“Recent weakening of Labour’s hold over the electorate has negatively affected the perception of the UK as a place to invest, with Keir Starmer’s worsening ratings a key cause of this,” he says. “For this reason, the potential election of a popular candidate like Andy Burnham would likely improve market perception of the UK from an investment perspective.”
Starmer said he will remain as leader until the Labour party chooses his replacement.
What Happens Next? Key Dates for UK Politics This Summer
- The nominations for new Labour leader are likely to open on July 9, with the party’s National Executive Committee setting out a timetable for a succession plan.
- Andy Burnham is expected to be announced as new Labour leader and prime minister before the summer recess on July 16.
- The new prime minister will appoint a new cabinet, which is likely to mean Rachel Reeves being replaced as chancellor.
- New economic policies will then be announced in the coming months.
- Parliament resumes on September 1.
UK Stock and Bond Markets Poised for New Prime Minister
Focus will now turn to Starmer’s potential successor and what their policies might be, with investors expecting volatility as cabinet appointments and policy take shape.
While former health secretary Wes Streeting was expected to run in a leadership contest, he has since backed Burnham, who now appears to be the overwhelming favorite according to betting markets.
“What will be interesting to watch from here is the extent that the party has a leadership contest, or whether it is considered a one-horse race and thus everyone steps aside,” says Richard Carter, head of fixed income research at Quilter Cheviot.
“Markets are wary of Burnham’s previous policy positions so they would prefer to see ideas for governing fleshed out via a leadership contest, keeping surprises to a minimum. There are difficult decisions around welfare and defense spending lurking, with each likely to have an impact on gilts and wider UK markets.”
Particular focus will be on who Burnham appoints as chancellor and their commitment to current chancellor Rachel Reeves’s fiscal rules. Burnham previously spooked investors by saying the UK should not be beholden to the bond markets. However, he has since said he would stick to the current government’s fiscal rules. Since the Labour election victory in July 2024, 10-year gilt yields have risen significantly, driven by domestic political risk, geopolitical events such as the Iran war, as well as changes to UK inflation expectations.
Oliver Faizallah, head of fixed income research at Raymond James, says there will be volatility in gilts markets in the coming weeks despite the lack of a reaction immediately following the resignation.
“As it stands, the long end of the gilt curve will likely remain a bit choppy as the market focuses on who will be the next prime minister,” according to Faizallah. “Andy Burnham is the front-runner and markets seem rather settled by that, especially following more recent rhetoric of being more fiscally responsible.”
“Gilts will no doubt experience some small periods of uncertainty-driven wobbles over the coming weeks,” he says. “I anticipate this largely to be driven by foreign holders of gilts who will no-doubt find the new system of musical PMs somewhat unsettling.”
In terms of equities, Morningstar’s Field says Burnham’s suggested policies are net neutral relative to those already in place.
“Of course, elements like the nationalization of utility companies would be a negative for that sector, but the likelihood of something like this being actioned is another question,” he adds.
