Sterling and Gilts Steady After Starmer's Resignation, Markets Focus on Burnham

UK Prime Minister Keir Starmer's resignation on Monday did not trigger significant turbulence in Sterling or the UK government bond market (gilts). While Starmer confirmed he would remain as caretaker until a successor is in place, market attention has swiftly shifted to the Labour Party's leadership contest and the potential premiership of Andy Burnham.

Starmer's departure had been widely anticipated, particularly following Andy Burnham's by-election victory in Makerfield last week. This expectation largely contributed to markets having priced in the news. Sterling saw a modest decline of around 0.27% against the dollar, trading near $1.3202, although it had already depreciated by about 3% since February amid increasing pressure on Starmer's leadership. Benchmark 10-year UK gilt yields initially edged up 1 basis point to 4.85% but later fell by 5 basis points to 4.80%. The FTSE 100 index, after an initial dip, rebounded to close 0.55% higher. Separately, Alan Greenspan, widely regarded as one of the most influential central bankers of modern times and former Federal Reserve Chairman, passed away at the age of 100 due to complications from Parkinson's disease. Greenspan served as Fed Chair from 1987 to 2006.

The muted market reaction stems not only from the anticipated nature of Starmer's resignation but also from the expectation that a leadership contest will help clarify future policy directions. Analysts highlight that markets are wary of Andy Burnham's previous policy positions, particularly his perceived inclination towards higher public spending and borrowing, which could impact gilts and broader UK markets. However, Burnham's efforts to assemble an economic team and his recent distancing from earlier fiscal policy statements have offered some reassurance. Richard Carter, head of fixed interest research at Quilter Cheviot, noted that markets would prefer a proper leadership contest to flesh out policy ideas and minimize surprises.

This latest political upheaval adds another layer to the UK's period of political instability since Brexit. Investors are concerned about whether the new prime minister can maintain fiscal discipline. Difficult decisions regarding welfare and defence spending are looming, each with the potential to directly influence gilts and the wider UK market. Furthermore, the appointment of the next Chancellor of the Exchequer is considered even more critical than the leadership outcome itself for reinforcing market confidence in fiscal credibility.

Analysts and market observers anticipate continued uncertainty regarding the direction of fiscal policy in the coming period. Ruth Gregory, deputy chief UK economist at Capital Economics, cautioned that market reactions could change if a more expansive fiscal policy is pursued during the leadership campaign or once the new government is in office. John Wyn-Evans, head of market analysis at Rathbones, emphasized that the UK's fiscal position remains tight, and recent experience has demonstrated how quickly bond markets can react to perceived policy missteps. In this context, the new leader's ability to balance party unity with fiscal prudence will be paramount.