UK mid-caps drop as political uncertainty and Middle East concerns hit sentiment
Market Reactions to Political and Geopolitical Uncertainty
By Niket Nishant and Shashwat Chauhan
May 12 (Reuters) - British mid-caps slumped on Tuesday, as investors were rattled by the uncertainty surrounding Prime Minister Keir Starmer's future, while renewed concerns about the war in the Middle East exacerbated inflation worries.
Political Instability and Its Impact
Starmer defied calls to resign, telling ministers he would get on with governing despite a "destabilising" 48 hours of growing calls to set out a timetable for his departure after a drubbing in local elections.
His position looks fragile because more than 80 Labour lawmakers have publicly called for him to set a resignation date so the party could install a new leader in an orderly manner.
Analyst Perspectives on Political Risk
"Increased political risk is intensifying pressures on UK financial conditions, already noted as the tightest among major economies," Evercore ISI analysts said in a note.
"The potential for prolonged uncertainty may hinder investment and exacerbate recession risks."
Market Performance and Sector Movements
BORROWING COSTS RISE
The domestically focused mid-cap FTSE 250 dropped 1.5%, clocking its biggest one-day fall in over six weeks. The pound also weakened 0.6% against the dollar.
Long-term UK borrowing costs surged to their highest level in nearly 30 years, driven by concerns that a potential successor to Starmer might adopt a more left-wing stance and advocate for increased spending, despite Britain's already strained finances.
Sector-Specific Impacts
The internationally exposed blue-chip FTSE 100 meanwhile, ended flat at 10,265.32 points after falling as much as 1.1% earlier in the day.
Bank stocks fell 2%, dragged lower by a 5.6% decline in shares of Metro Bank and a 3.3% drop in Barclays.
Aerospace and defence stocks also slipped 2%, while the rate-sensitive real estate sector fell 3.1%.
Defensive sectors including healthcare, food and beverages and personal care all rose, offsetting losses on the broader index.
Middle East Stalemate and Inflation Concerns
MIDDLE EAST STALEMATE INCREASES INFLATION RISK
Investors were also concerned by the lack of progress in resolving the Middle East conflict, with U.S. President Donald Trump saying the ceasefire with Iran was "on life support".
Tehran rejected a U.S. proposal to end the conflict and stuck to a list of demands that Trump described as "garbage".
Oil Prices and Energy Sector Response
Oil prices jumped, with Brent crude futures rising 3% and adding to fears of increasing financial burden on UK households.
British oil and gas stocks also climbed 1.1%.
(Reporting by Niket Nishant and Shashwat Chauhan in Bengaluru; Editing by Maju Samuel)
