UK political uncertainty notches up again, sterling dips
Renewed Market Pressure Amid UK Political Turmoil
LONDON, May 14 (Reuters) - British markets came under renewed selling pressure on Thursday after a key member of the UK government quit his post, raising speculation about a leadership challenge to Prime Minister Keir Starmer's position and renewed political instability.
British health minister Wes Streeting resigned from government, saying he had lost confidence in Starmer's leadership.
Sterling edged lower and was last down 0.1% around $1.351, while benchmark 10-year gilt yields held lower on the day, and were last down nearly 5 basis points at 5.02%.
Market Reactions and Analyst Commentary
COMMENTS:
Labour Leadership Challenge and Sterling Outlook
NICK REES, HEAD OF MACRO RESEARCH, MONEX EUROPE, LONDON:
Uncertainty Over Labour Leadership
"It moves us one step closer to a Labour leadership challenge. How many steps are between here and there that's still uncertain. It's notable that in Streeting's letter he expressed a preference for a wide field in the leadership election. The 30,000-foot view is you have a drawn-out contest and persistent uncertainty weighing on sterling."
Fiscal Policy and Market Drivers
KENNETH BROUX, HEAD OF CORPORATE RESEARCH FX AND RATES, SOCIETE GENERALE, LONDON:
Candidate Impact on Markets
"In terms of the candidates, for sterling and gilts, he (Streeting) is going to be the most favoured, he's going to keep with the fiscal rules, pro-EU, doesn't pose a threat to further deterioration of the public finances.
But if you look at market moves this week the politics are in there and in the background but it's more about the Fed and inflation
Gilts and Global Influences
When you look at 10-year gilts -- 30 year can be illiquid so I don't look at them -- in terms of the 10-year, UK gilts are 1/1.5 (bps) wider than U.S. in the past week. The (UK) politics have been secondary to U.S. inflation this week."
Uncertainty Over Fiscal Policy Direction
PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:
Potential Leadership Challenge
"Wes Streeting's resignation represents a new chapter in the level of uncertainty in the UK. And one presumes that he's got the 81 votes behind him necessary to issue a formal challenge to the Prime Minister.
Of course, the wider question is how many other candidates will enter the field. Who's going to get down to the last two and out of those who is going to win? And that's a very difficult question at the moment because we don't know who the other entrants are going to be."
Fiscal Policy Concerns
"The big question is that the markets want to know how does this leave the direction of fiscal policy. It certainly opens up a huge amount of uncertainty, but we honestly don't know yet. At the moment, there are a lot of questions, not a whole lot of answers."
Awaiting Further Developments
CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIWA CAPITAL MARKETS, LONDON:
Leadership and Policy Uncertainty
"We have to wait and see who we ultimately get, assuming there is a challenge."
"Clearly there's a lot of uncertainty about where policy will go but it's not necessarily the case that UK fiscal policy will be set on any reckless path going forward."
"Streeting is not clear how much fiscal loosening his leadership might imply and nor would we see Streeting as being the favourite. We don't rule out Starmer withstanding the challenge, either."
External Factors and Market Outlook
"The war in Iran and rising energy costs mean bond markets broadly could come under pressure. At the margin, we expect gilts and sterling to underperform in the short term."
(Reporting by the Reuters Marksts Team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)
