Keir Starmer Resigns

Keir Starmer has resigned as Prime Minister following a period of political pressure and poor results in May’s elections. The market’s attention now turns to the upcoming leadership contest and the direction of UK fiscal policy under a new government.

Market reaction

So far, the market reaction has been relatively muted. Investors have been pricing in the inevitability of Starmer’s resignation for a number of months now. On Friday, we did see an increase in gilt yields (gilt prices fall as yields rise) and weakening in sterling, as Andy Burnham cleared another hurdle to becoming Prime Minister by winning the Makerfield by-election. After this, Starmer’s resignation started to look more a matter of when-not-if.  Albeit, in the context of the market volatility seen over 2026, these moves were mild and, indeed, have partially reversed over Monday (at time of writing).

In terms of equities, the UK market is broadly flat since Thursday, reiterating that the UK market’s global nature means it is typically more insulated from domestic concerns.

Looking ahead

Andy Burnham is the overwhelming favourite to be the next Labour leader and therefore Prime Minister, but there are still two possible paths for him to get there. Markets would favour somewhat of a coronation where he is the only leadership candidate and therefore no contest is required, as this would bring greater certainty faster. The alternative path, with multiple candidates entering a contest, would likely lead to contenders making promises and pledges in order to gain support with the Labour party membership. Given the political leanings of the membership, this would likely come in the form of looser fiscal policy.

Burnham is expected to favour expanding borrowing further which may be negative for the gilt market, given greater levels of issuance. However, he has recently tried to roll back from previous rhetoric aimed at the bond market by supposedly consulting with former senior people from the OBR and Bank of England. Who he appoints as Chancellor will also send a message to investors.

Ultimately for gilt and sterling investors it comes down to the outlook around government borrowing, inflation and fiscal credibility.

For UK equities, the overall impact at an index level is likely to remain limited; however, domestically focused sectors and companies could see more volatility depending on the policy stance of the next leadership team.

Portfolio implications

We retain conviction in our current positioning given this morning’s news was already expected by investors. While political uncertainty can drive short-term volatility, our approach remains to maintain a well-diversified portfolio.  In equities, we hold a range of regions and currencies to support this diversification.  In fixed income, we continue to favour global exposure rather than a concentrated allocation to UK government bonds, reflecting the increasing sensitivity of the gilt market to domestic political developments.