Starmer drama to put pressure on gilts, pound

Labor MPs are increasingly likely to move against Keir Starmer after the disastrous election results, potentially opening the door to a leadership contest that could ultimately deliver both a new prime minister and chancellor.

The CEO of one of the world’s largest independent financial advisory organizations has warned that political turmoil is expected to put fresh pressure on gilts and sterling.

Warning from Nigel Green Deavere Group It comes as Labor has suffered a tough defeat in England’s local elections, Reform UK has made big gains in former Labor strongholds, and senior figures inside the governing party are openly discussing Keir Starmer’s future.

Early results showed Labor losing councils including Westminster, Wandsworth, Hartlepool and Redditch, while Reform UK gained hundreds of seats.

It is reported that several Labor MPs publicly demanded the Prime Minister’s resignation this Friday morning.

“It feels like open season has begun inside Labour. An election defeat on this scale destroys authority, stokes rivalries, and encourages ambitious figures to step in, with some people making not-so-subtle signals towards Number 10 as we are already seeing.

“The market will see this as a danger signal.

“Investors are now asking a different question. The focus has shifted from whether Starmer has weakened to whether he survives.

“Bond markets hate uncertainty around fiscal policy and leadership succession. The UK is now facing both at the same time.

“The market remains fairly settled at the moment as traders are still waiting to see how brutal the final results will be and how openly Labor MPs will attack the Prime Minister after the counting of votes has finished.

“Quiet conditions in the UK bond market can change very quickly.

“The UK already carries the highest borrowing costs in the G7. Political turmoil, stretched public finances and persistent inflation concerns on top of weak growth make a dangerous mix for gilts.”

Political traders and institutional investors have long memories. The gilt market remains highly sensitive following the disastrous 2022 Truss ‘mini-budget’.

Any suggestion of disarray around economic leadership, tax policy, or borrowing plans risks triggering a more aggressive reassessment.

“I believe that a leadership contest will certainly produce a new Chancellor with a new Prime Minister.

“Financial markets will immediately begin to reevaluate spending priorities, borrowing assumptions, taxation and the relationship with trade. Sterling volatility would increase sharply under that scenario,” says the Deavere CEO.

“Confidence in the pound depends largely on international confidence that Britain remains fiscally credible. Leadership chaos threatens that confidence.

“Foreign investors need stability, predictability and discipline. Westminster currently offers little of those.”

“Each increase in gilt yields directly impacts the real economy. Mortgage holders, businesses seeking loans and taxpayers all feel its impact.

“Britain has entered an ever more fragmented political era. Traditional party loyalties are breaking down in many areas at once. Financial markets immediately recognize the importance.

Labour’s election defeat “could rapidly turn into a full-scale crisis of the right.”

Some investors are now considering the realistic possibility that Britain will have a new prime minister and a new chancellor sooner than expected.

“If political fighting within the government intensifies and leadership uncertainty deepens, the gilt and pound are likely to come under fresh pressure as markets reassess the risks to the UK economy.”

Most council results are still due after Friday, along with parliamentary election results in Scotland and Wales, where nationalist parties are expected to perform strongly.

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