UK Markets Decline as PM Starmer Faces Leadership Challenges

Impact of Political Turmoil on UK Markets

LONDON, Feb 9 (Reuters) - British stocks, bonds and the pound came under pressure on Monday as Prime Minister Keir Starmer faced calls to quit from his party's leader in Scotland after two key aides resigned in as many days.

Market Reactions to Leadership Issues

UK markets found some late support after former deputy prime minister Angela Rayner backed Starmer, while health minister Wes Streeting said he did need not to go. Both are seen as possible successors.

Economic Indicators and Predictions

Even so, UK assets underperformed. 

Gilt Yields and Currency Fluctuations

Britain's 10-year gilt yield was last up around 2 basis points at around 4.53%, after touching 4.6% earlier, while 30-year gilt yields briefly hit their highest since November. When a bond yield rises, its price falls. Gilts still underperformed U.S., French and German counterparts.

Public Sentiment and Political Stability

Sterling stayed lower against the euro but trimmed losses, last down roughly 0.3% at 87.10 pence. London's FTSE 100 stock index erased earlier falls and edged into positive territory.

Starmer, whose Labour party won a landslide in July 2024, has struggled in the polls as his government falls short on tackling the cost-of-living crisis and reviving the economy.

He has recently faced heavy criticism after his choice for U.S. ambassador, Peter Mandelson, was forced to resign over links to the late U.S. sex offender Jeffrey Epstein.

Finance minister Rachel Reeves is also under pressure to stick to her fiscal rules to keep public finances on track.

"I'm not really sure if you change the skipper on the Titanic, the outcome's going to change too much. They're all (UK leaders) dealt the same fiscal hand and budget constraints and the reality of what the UK economy is like," said Nick Kennedy, FX strategist at Lloyds.

"So, changing the leadership might seem to be a reset, but it's probably not going to change too much in reality."

UNCERTAIN TIMES

Some Labour lawmakers have openly criticised Starmer's judgment and investors are bracing for a possible challenge to his leadership. He will meet Labour lawmakers later on Monday.

"The decision by his most senior adviser to fall on his sword may buy Starmer some time, but signs of widespread discontent on the backbench, compounded by diabolically bad poll results, are creating the impression that his days are numbered," said Benjamin Picton, senior market strategist at Rabobank, referring to aide Morgan McSweeney's resignation on Sunday.

Prediction site Polymarket last put the odds of Starmer stepping down by month-end at about 30%.

On February 5, during an earlier flare-up of concern over Starmer's future, 10-year gilt yields jumped to their highest since November 20 at 4.605% before retreating sharply after the Bank of England came closer than expected to cutting rates.

(Reporting by Andy Bruce, Amanda Cooper and Dhara Ranasinghe. Editing by Gareth Jones, Anil D'Silva and Mark Potter)