Pound, gilts rise after UK prime minister Starmer resigns

The pound and gilts edged higher after UK Prime Minister Keir Starmer resigned and the path to power began to clear for the frontrunner to succeed him.

UK 10-year bond yields fell four basis points to 4.80%, while the pound rose 0.1% against the dollar to $1.3244 and 0.2% versus the euro.

Starmer’s resignation statement was followed quickly by an announcement from Andy Burnham that he would seek to become the next premier. The chances of a smooth transition increased when Wes Streeting, until recently seen as a potential rival candidate, said he would back Burnham. Investors are focused on what impact a new leader will have on the nation’s finances, and who that person might pick as their Chancellor if Rachel Reeves is sacked.

“This implies a smooth transition without many delays and more importantly could also increase the chances of Streeting to have a prominent role in cabinet as Chancellor,” said Pooja Kumra, senior UK and European rates strategist at Toronto Dominion Bank. “With Streeting considered to be fiscally conservative, this transition could be supportive for Gilts and the pound.”

Burnham has offered little clarity so far on the potential policies he’d pursue, making it difficult to gauge the ramifications for future borrowing. Streeting’s support could reassure investors who may be nervous about any potential increase in bond sales to fund spending, given the UK is already struggling with its debt levels.

Nominations for a contest for a new leader will open on July 9, Starmer said, and be completed by the Sept. 1, with him remaining in post until the process is concluded. However, a new prime minister could be in place by July 17 or 18 if there is only one candidate, according to a person familiar with the process quoted by Bloomberg.

Political pressure

UK bond yields have fallen in recent weeks on optimism around a peace deal between the US and Iran. They reached an 18-year high last month as the Middle East turmoil sent oil prices soaring, stoking inflationary concerns. Political turmoil in the UK added to the pressure after Starmer’s Labour Party took a beating in local elections at the start of May.

That loss set in motion Burnham’s bid for a seat in Parliament. His victory last week in the Makerfield by-election — where he trounced Nigel Farage’s poll-leading Reform UK party — led many Labour MPs to conclude he’s their only shot at stopping the right-wing populists at the next general election, which is due by 2029.

What Bloomberg Strategists Say…

“Burnham’s succession is looking more assured as one of the top potential rivals for the job, Wes Streeting, has said he would back Burnham. This makes it less likely any candidate will have to offer some policy red meat to the leftist MPs in the Labour party to win. As far as the markets are concerned, that is a good thing.”

-Simon White, Macro Strategist.

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The pound has been pressured recently as questions mounted over Starmer’s fate. Expectations that the Bank of England may raise interest rates less than its US counterpart this year have also weighed on the currency, with sterling weakening about 2.5% since the elections on May 7.

Options traders were already positioned for further pound weakness. One-week risk reversals, a widely used gauge of market sentiment, traded near the most bearish levels for sterling in a month.

The pound’s performance against the euro suggests it is fairly valued in the short term, according to ING Groep NV currency strategist Francesco Pesole.

This is both good and bad news for sterling as “it signals that markets are relaxed about this government change, but that means a greater downside for the pound should fiscal concerns resurface,” Pesole said.

Equity market reaction was relatively muted. The internationally-exposed FTSE 100, which benefits from a weaker pound, edged 0.2% higher by 11:28 a.m. In London. The domestically-oriented FTSE 250 fell as much as 0.7%, underperforming European peers.

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