Starmer resignation an 'unambiguously negative' development for UK assets

Starmer’s resignation confirms what markets have been nervously anticipating for weeks: Andy Burnham is heading to Downing Street.

Sterling and gilts are holding up for now, but we view this as an unambiguously negative development for UK assets. The transition itself will introduce a period of uncertainty that markets will find uncomfortable. A prolonged leadership contest or policy vacuum before Burnham takes office could keep pressure on gilts and sterling in the interim - regardless of his ultimate policy direction.

Burnham sits firmly to the left of the Labour Party, and his record as mayor points to a significant step-up in public spending, a higher tax burden and greater gilt issuance. This is an experiment that the UK can ill-afford. Debt is at its highest relative to GDP since the 1960s, growth is weak, debt-servicing costs are already vast and the limited fiscal headroom leaves almost no room to manoeuvre, risking a self-reinforcing borrowing and growth trap.

Although Burnham has walked back his infamous suggestion that the UK should not be “in hock” to the bond markets, investors have long memories. The critical near-term question is who becomes Chancellor. Continuity with Rachel Reeves would be the market’s preferred outcome, but any indication that a new Chancellor intends to loosen or abandon the existing fiscal rules could trigger fresh selling in UK assets.