LONDON: The pound and UK government bonds climbed on Friday after British Prime Minister Sir Keir Starmer said he would not resign despite bruising losses for his ruling Labour Party in local elections.
Starmer’s Labour haemorrhaged support in areas reporting overnight, with results still rolling in on Friday. The populist Reform UK party of Brexit campaigner Nigel Farage was so far the main winner, gaining more than 350 council seats in England.
Investors have been concerned that should Starmer be forced out of office, a new, left-leaning Labour leader could boost public borrowing.
The pound was last up 0.5 percent at USD1.362, and rose 0.1 percent against the euro.
Meanwhile, Britain’s benchmark 10-year Gilt yield, a proxy for government borrowing costs, was outperforming global markets and had fallen 5 basis points. Yields move inversely to prices.
It was too early to gauge the full impact of the results, analysts and investors said, but Starmer vowing to stay on had reassured markets somewhat.
“I think it’s an initial relief rally,” said Lloyd Harris, head of fixed income at Premier Miton Investors. “But ultimately I think the fireworks are still to come.” “I would say it’s a small net positive for Gilts that actually the Greens haven’t done better,” Harris said, adding that it reduced the chances that the left-wing party, which would likely increase spending, could win a general election.
Britain’s FTSE 100 stock index fell 0.5 percent as oil prices rose on concerns about the fragile Iran ceasefire, but slightly outperformed broader European equity markets.
UK markets have been jittery in the run-up to the local elections as some investors think the likely replacements for Starmer would move Labour leftwards and increase spending, adding to the pressure on government bonds.
“We don’t think any of the alternatives to Starmer are likely to be sterling positive,” said Nick Rees, head of macro research at Monex Europe.
“Angela Rayner, clearly from the left of the party, would scare bond markets, as likely would Andy Burnham,” he added, naming two Labour politicians often cited as potential challengers to Starmer.
UK 10-year bond yields have traded at 18-year highs in recent weeks, while 30-year yields rose to their highest since 1998 earlier this week.
Lale Akoner, global market analyst at eToro, said gilts could sell off again if credible leadership challenges materialise.
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