Weekly Comment: Muted market reaction as UK PM Starmer resigns

Market overview

Here we go again. News broke on Monday morning that UK prime minister Keir Starmer, has resigned from his role after just short of two years in the job. His successor, expected to be in place by September at the latest, will be the UK’s 7^th prime minister since the Brexit referendum in 2016

Andy Burnham is widely seen as the most likely candidate to lead the Labour Party, with his chances seemingly boosted further by the support of Wes Streeting on Monday morning — Streeting had been seen as a potential candidate himself. A key thing to watch will be whether there even is a leadership contest or whether it is considered so much of a one-horse race that everyone else steps aside for Burnham.  Should there be no leadership contest then the next leader could be in place in a matter of weeks, before parliament breaks for its summer recess

Last week, Burnham’s resounding victory in the Makerfield by-election seemingly made Starmer’s position untenable. The significant margin of victory was not just a strong endorsement of Burnham’s support to return to Westminster as an MP, but also the fact that in beating the Reform candidate, Rob Kenyon, so convincingly he displayed his credentials as the most likely person to prevent Reform winning the next general election.

Keir Starmer has performed particularly badly in opinion polls for some time now and, together with the disappointing Labour Party results in the May local elections there was an air of inevitability about recent events. There is a feeling that Burnham would be to the left of Starmer economically and therefore could potentially lead to a less fiscally disciplined approach.

Markets are wary of Burnham’s previous policy positions and, with difficult decisions around welfare and defence spending lingering, will be closely watching events unfold. Having said that, there is still a feeling that Burnham will not be radically different in terms of government borrowing, with bond investors gaining some reassurance from reported conversations between Burnham and the likes of Jim O’Neill, former Goldman Sachs chairman. Together, this explains the relatively muted market reaction to Starmer’s resignation in gilts, sterling and UK stocks.

That is not to say that potential risks have not increased, with the markets having grown accustomed to being relatively comfortable with current chancellor of the exchequer, Rachel Reeves, and her clearly communicated fiscal discipline. Along these lines, the next chancellor of the exchequer will be an important appointment for financial markets, with gilts especially sensitive to any unwanted shocks. Ed Miliband and Pat McFadden are the early frontrunners, according to the bookmakers.  

Good news on inflation but borrowing figures a concern  

The latest economic data paints a mixed picture of the UK economy, with inflation holding steady but government borrowing figures rising substantially. The consumer price index held steady at 2.8% annually in May, a pleasing development given the expectation for a rise to 3.0%. While the conflict in the Middle East has undoubtedly boosted price pressures, for now the rise appears to remain contained.

Furthermore, while getting over the line is proving challenging, the rhetoric from both sides on a peace deal is undoubtedly encouraging and with oil prices, as measured by Brent Crude, falling back below US$80 a barrel, one of the potentially major inflationary forces appears to be waning.   

The delicate situation that Burnham could walk into is shown clearly by the latest borrowing figures as public finances clearly remain incredibly stretched and strained. Borrowing for May was £23.3bn, 30% higher than the same time last year and comfortably above the £17.7bn forecast by the OBR. While yields have come down in recent weeks as the US and Iran resolve their conflict, borrowing is higher than it was last year and bond markets are still uncomfortable with the level of borrowing and lack of spending cuts.

This messy economic inheritance for the next incumbent of number 10 means there is unlikely to be a silver bullet to the UK’s economic struggles. Burnham is reportedly not seeking a new mandate should he take on the job, which will likely mean more tinkering with personal taxation and a further drag on growth. Gilt yields have crept up in recent days as the political picture becomes a little clearer. The yield premium versus developed market peers shows that investors and markets are still requiring relatively higher returns for lending to the UK government and they will want to see a credible economic plan to fuel higher growth and put the public finances back onto a surer footing.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week up 1.3% (12.0% YTD), boosted by hopes of a resolution to the Middle East conflict due to the signing of a memorandum of understanding between the US and Iran.

United States:

Large-cap US stock benchmarks ended the holiday-shortened week up 1.0% (10.2% YTD). Growth stocks outperformed, rising 1.4% (4.5% YTD) and clawing back some of the underperformance versus value stocks, the latter rising 0.3% (16.0% YTD). Tech stocks rose 2.4% (14.4% YTD).

The main event on the economic calendar was the first Federal Reserve meeting with Kevin Warsh as chair. While the federal funds rate was left unchanged at the 3.50%-3.75% target range, the subsequent press conference did lead to some hawkish repricing. Warsh had been seen as potentially more likely to pursue a lower interest rate path than his predecessor, but his comments pushed back on this belief to some extent.

Short-term yields rose 10 basis points on the week to 4.18% and the 71 basis point rise YTD demonstrates how expectations for several rate cuts coming into 2026 appear wide of the mark. In doing so, the yield hit its highest level of the year.

United Kingdom:

UK stocks underperformed on the week, with large-cap benchmarks ending down 1.0% (6.2% YTD). Mid-caps also declined, falling 0.5% (5.0% YTD). As expected, the Bank of England kept its base rate steady at 3.75%. The 10-year gilt yield ended the week little changed at 4.84% (up 37 basis points YTD). Sterling closed the week at US$1.32, down from US$1.34. The move appeared to be mainly due to wider US dollar strength rather than specific weakness in the pound.

Europe ex UK:

A 1.1% gain for the MSCI Europe ex UK took the YTD return to 10.1%. German benchmarks added 1.4% (2.0% YTD), French stocks rose 0.8% (5.8%) and Italian bourses tacked on 2.6% (20.6% YTD). The euro ended the week at US$1.15, down from US$1.16.

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