Markets take Starmer resignation in their stride

On Monday, Sir Keir Starmer resigned as UK prime minister, a move that had been widely expected following Andy Burnham’s victory in last week’s Makerfield by-election.

A change of prime minister can, of course, lead to shifts in government policy, with potential fiscal and market implications – particularly for UK government bonds (gilts). However, it is too soon to make any assessment of any potential policy changes until the outcome of the leadership vote is known. Against this backdrop, it is worth outlining how the current period of political flux in the UK is affecting financial markets.

Reassuringly, the immediate market reaction has been extremely muted. UK gilt prices showed little movement following the announcement, largely because the outcome had already been priced in. Prediction markets had last week assigned a near certainty to a leadership change, giving investors sufficient time to assess the implications.

Focus turns to likely successor

Former Manchester mayor Andy Burnham is widely seen as the front-runner, and markets appear relatively comfortable with this prospect – particularly in light of his recent rhetoric emphasising fiscal discipline.

Mr Burnham has committed to adhering to the government’s existing borrowing framework, or fiscal rules. This stance follows a brief period of volatility after earlier comments that raised questions about those financial red lines – introduced by Chancellor Rachel Reeves in October 2024 to reassure bond markets of the government’s commitment to fiscal responsibility.

What is perhaps more surprising is the speed of Sir Keir’s resignation and the accelerated timetable for selecting his successor. The Labour Party leadership contest is already under way, with the aim of completing the process swiftly.

Sir Keir has asked Labour’s National Executive Committee to establish a timetable, with nominations expected to open on 9 July and the process concluding before the summer recess. This would ensure that a new prime minister is in place before parliament returns. Financial markets typically favour certainty, so a swift – but orderly – transition should be supportive.

What could this mean for markets?

Over the coming weeks, longer-dated UK gilts may remain somewhat volatile as investors focus on the leadership outcome and any potential policy direction this may imply. Some episodic, uncertainty-driven moves are likely, particularly given the sensitivity of overseas investors, who have already been unsettled by the UK’s recent political turnover – Britain has had six prime ministers since 2010. 

That said, the broader market impact of today’s developments is likely to remain limited. While domestic political uncertainty may exert some influence, we expect gilt yields to be driven more by global factors, including developments in US-Iran relations, movements in oil prices and incoming inflation data.

In that context, events in the Middle East are likely to be a more significant driver of markets than the evolving political situation in Westminster. We shall, as ever, be continually monitoring the situation and will provide you with updates should they be necessary.