Investors tread rocky road from Starmer exit to next finance minister
By Amanda Cooper and Dhara Ranasinghe
Political uncertainty and market reactions in the UK
LONDON, June 22 (Reuters) - Investors and business leaders are again navigating the kind of uncertainty that has dominated British politics since the Brexit vote a decade ago, after Prime Minister Keir Starmer resigned on Monday and threw open a leadership contest that will centre on any successor's plans for the economy.
Leadership contest and potential finance ministers
Starmer, who has been in the job less than two years after his Labour party won a landslide election victory, said nominations for his replacement would open on July 9. His rival Andy Burnham said he would put himself forward, with market focus on who the former Greater Manchester mayor might pick as finance minister.
Economic backdrop: Borrowing costs and fiscal challenges
Britain has the highest borrowing costs in the Group of Seven wealthy nations due to its high debt and interest payments, years of anaemic economic growth, its struggles to cut spending and the need to invest in areas like defence.
Market sensitivity to political developments
UK government bonds are likely to be highly sensitive to the leadership contest. Former health minister Wes Streeting on Monday said he would endorse Burnham as prime minister, which helped nudge gilt yields lower on the day and supported sterling.
Market perspectives on fiscal rules
"It does seem like there could be a smooth transition and because Burnham has said he will not change the fiscal rules, markets are moving on," said Michael Metcalfe, head of macro strategy at State Street Markets.
"We still need to get clarity on what will change if the fiscal rules stay the same. So, from a markets point of view there will be a laser focus on the costs of any policy changes and what they mean for economic growth."
Betting site Polymarket showed a 42% chance that Streeting could be Burnham's choice for finance minister, up from around 30%, albeit in thin trading.
'A CORONATION OR A CONTEST?'
Sterling, which has lost some 3% since pressure on Starmer began to heat up in February, was roughly unchanged on the day at $1.324, up from $1.318 earlier.
Bond and stock market movements
UK 10-year gilt yields fell 2.5 basis points to around 4.82%, still not far off their highest since the 2008 financial crisis. This means Britain must pay more for its medium-term borrowing needs than any other developed nation.
Britain's blue-chip FTSE stock index meanwhile crept higher and was last up 0.4%, while the more domstically-focused FTSE-250 was down almost 0.3%.
Investor sentiment and volatility
"The question is, is it going to be a coronation or a contest? If it's a coronation, then I think we can see a little bit of a rally in gilts and/or sterling holding on," CIBC head of G10 currency strategy Jeremy Stretch said of Starmer's potential successor.
Political instability and concern over Britain's stretched finances have made investors wary of sterling and gilts, which have been prone to higher volatility than other markets, particularly since the UK's vote to leave the European Union, the 10th anniversary of which falls on Tuesday.
Policy outlook and business impact
Burnham is viewed as being more left-leaning than Starmer, and although he has said he will stick to incumbent finance minister Rachel Reeves' tight fiscal rules, investors will need to see proof.
Potential changes in bank taxes
In terms of the impact on business, analysts said one possible consequence of a change in leadership might be an increase in bank taxes as a means of helping to close the gap in Britain's finances, at a time when lenders are reporting robust results.
Market trust in new leadership
"The market wants to believe that he is responsible and understands the significance and fragility of the gilt market and thus has been prepared to take him at his word, particularly after he committed to maintaining the fiscal rules," said James Athey, fixed income portfolio manager at Marlborough.
(Additional reporting by Alun John, Samuel Indyk, Naomi Rovnick and Lawrence White in London and Danilo Masoni in Milan; Editing by Alexander Smith, Jan Harvey, and William Maclean)
