Sir Keir Starmer has resigned as Prime Minister (Image: Getty)
The FTSE 100 has “rebounded” but government bond prices are under pressure following Sir Keir Starmer’s resignation as Prime Minister on Monday (June 22). His resignation, following heavy local election losses and the emergence of Andy Burnham as next leader of the Labour Party, have fueled investor anxiety and inflation fears.
The gilt, a bond issued by the government in return for regular fixed interest payments, market has been hit by soaring borrowing costs and global inflation risks. The UK 10-year gilt years have climbed more aggressively than those in the US, France and Germany, reflecting a heavier risk on British debt. They currently stand as 4.81% which is higher than the US (4.48%), France (3.72%) and Germany (2.96%).
Tony Redondo, founder and director of Cosmos Currency Exchange said: “UK gilt yields face upward pressure, with the 2, 10, and 30-year at 4.21%, 4.81%, and 5.5%, carrying a considerable risk premium over economic peers with the benchmark 10-year bond yields for the US (4.48%), France (3.72%), and Germany (2.96%).
“While long-dated gilts are higher than the 5.1% peak of 28 September 2022 Truss mini-budget shock, trading lacks that era’s chaotic LDI pension fund panic, reflecting a gradual global adjustment to debt and structural inflation instead.”
He added: “Adding to market calculations is the political transition following Andy Burnham’s Makerfield by-election victory and Keir Starmer’s resignation this morning. Ahead of an autumn transition, the City is hyper-focused on Burnham’s choice for Chancellor. Selecting Ed Miliband would signal aggressive green borrowing that would likely unnerve already wary bond markets.
“Opting for Yvette Cooper would be seen as offering orthodox fiscal discipline. The gilt market’s ultimate trajectory depends on whether Burnham’s Treasury leans toward radical spending or traditional restraint and a fresh focus on economic growth.”
Andy Burnham is tipped to become the next Prime Minister (Image: Getty)
Starmer confirmed his resignation on Monday morning, saying he has “heard the answer of my parliamentary party”. He will remain in post until a new Labour Party leader is selected, with Andy Burnham widely tipped to replace him.
According to Trading Economics, a financial and macroeconomoc data platform, the FTSE 100 moved above other European markets on Monday as investors assessed the impact of Starmer’s resignation. Banking stocks led, with HSBC up 0.9% and Lloyds Banking Group, Barclays, NatWest and Standard Chartered all rising by nearly 2%.
Likewise, Shell was up 06% and BP was also trading higher. EasyJet gained over 2% while Babcock fell 5% after reporting a drop in pre-tax profit.
Meanwhile, experts are also warning that the housing market faces further uncertainty following the Prime Minister’s resignation. They explained how political volatility can push up borrowing costs.
Adam French, Head of Consumer Finance at Moneyfactscompare.co.uk, said: “Money markets had already begun pricing in fresh political uncertainty after last week’s by-election results, with gilts and swap rates rising by around 10 basis points and holding at those levels. As a result, Sir Keir Starmer’s resignation has prompted a fairly muted response so far, with the effects already largely reflected in funding costs.
The FTSE 100 moved higher on Monday (Image: Getty)
“Episodes of political volatility tend to push up borrowing costs as investors demand a greater premium for perceived risk. Much will now depend on the fiscal policies put forward by future PM apparent Andy Burnham and anyone else vying for the Labour leadership, particularly their approach to taxation and public spending.
“The lessons of the 2022 mini-Budget remain fresh. Fiscal headroom is tight and money markets will be watching the UK closely. If plans don’t add up, the subsequent loss of confidence can quickly drive up borrowing costs. Once again, it is households which risk picking up the tab if market confidence is undermined.
“For those due to get a new mortgage later this year, there are steps they can take to reduce the risk of being caught out by rising rates. Many lenders allow borrowers to secure a new deal up to six months before their current mortgage ends, providing valuable protection should uncertainty push rates higher in the meantime. If rates do fall, borrowers can usually switch to a cheaper deal before completion without penalty.”
The housing market also faces uncertainty (Image: Getty)
Elliott Culley, Director at Hayling Island-based Switch Mortgage Finance, said the housing market needs more stability. He added: “For the housing market to recover and grow it requires stability and steadiness governing the UK.
“This seems almost impossible right now as another prime minister fails to last the full term. Markets always act cautiously to change and an increase in swap rates and gilts would be expected, just as they had started to fall.”
Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, said who Burnham chooses as Chancellor will be pivotal. He added: “Whoever eventually takes residence at Number 10 will probably have limited impact on housing. The eyes need to be on who will take Number 11, as the Chancellor will have the greatest say in the housing market from this point on.
“The uncertainty over the next few months may result in fluctuating mortgage rates and markets generally, until the new tenants of Downing Street set their direction. Confidence will lower rates and drive homebuilding, otherwise we will be in a political mess once again.”