Revolving Door Turns, Uncertainty Starts Falling

Editors’ Note: MarketMinder is politically agnostic. We prefer no party nor any politician and assess developments for their potential market implications only.

Six-plus weeks after his Labour Party got drubbed in local elections—and less than two years after winning a “loveless landslide” general election—UK Prime Minister Keir Starmer resigned Monday. The move caps weeks of rumors and speculation and follows now-former Manchester Mayor Andy Burnham’s by-election victory in Makerfield last Thursday, which returned him to Parliament and enabled him to challenge Starmer. Now he is the presumed successor, though things might get complicated. However this resolves, the political uncertainty hanging over UK stocks is starting to dissipate, which should aid their continued climb up the wall of worry.

As we write, Burnham is the only Labour leadership challenger in the ring. Would-be rival Wes Streeting, who kicked off the leadership storm by resigning as health secretary last month, declined to run and cast his lot with Burnham instead. Other rumored challengers, including former Deputy Prime Minister Angela Rayner and Energy Secretary Ed Miliband, are reportedly jockeying for position in a Burnham cabinet rather than rallying leadership support. Accordingly, much of Monday’s scuttlebutt presumed Burnham will run unopposed and take office next month. But The Telegraph reported late in the day that Starmer’s allies are pushing cabinet member Darren Jones to stand as a continuity candidate. If he does and a traditional leadership contest ensues, Starmer could remain as caretaker leader until September.

Either way, UK stocks will get clarity on their next prime minister—an unknown will become a known. At some point, we will also get clarity on whether the new leader will hold a snap election, which Burnham didn’t rule out when asked Monday (though his team later did). While choosing a snap vote might seem odd given Labour’s sagging poll numbers, Burnham famously called for former Prime Minister Rishi Sunak to hold an election after he succeeded Liz Truss in an unopposed leadership contest in 2022, potentially boxing him in now. Burnham (or whoever) may also decide a snap vote when opposition parties are on the back foot may be more fruitful than giving the Conservatives and Reform the full parliamentary term to prepare. Resolution either way should help stocks move forward.

Most of Monday’s market-related coverage took a Burnham premiership as a foregone conclusion, though, which makes it worth exploring. Political watchers generally place Burnham left of Starmer, raising the usual bogeymen of aggressive tax hikes, nationalizations and higher debt. Analysts envision Chancellor of the Exchequer Rachel Reeves getting replaced by someone more spendthrift, supposedly shredding the UK’s bond market credibility. Best we can tell, none of it stems from actual policy proposals, which were largely absent from the Makerfield campaign. Rather, commentators seem to be projecting Burnham’s past off-hand comments about the UK taxing work too much and wealth too little. So there is a lot of talk about wealth taxes, mansion taxes and the like.

We think it all goes too far, likely creating some positive surprise potential. Burnham may not have oodles of political capital. His chief appeal seems to be that he has been out of Parliament since 2017, giving him “above the fray” status. His popularity in Manchester also helps. But it is worth remembering Burnham twice lost Labour leadership races, trailing distantly against Miliband in 2010 and Jeremy Corbyn in 2015. He U-turned on several issues during the Makerfield campaign, and while he has hinted at fiscal largesse, he has also pledged to uphold the UK’s statutory fiscal rules. Meanwhile, the Labour Party’s divisions run deep, and its next leader will face the same internal opposition that hamstrung Starmer. To us, the biggest winner looks like the status quo.

With everyone warning of a “lurch to the left” harming UK stocks and bonds, the status quo would be a positive surprise. Markets are already seemingly saying as much, taking Starmer’s resignation and Burnham’s presumptive ascension in stride. UK stocks rose Monday, and while bond yields inched up a bit, so did yields across Europe. UK yields have also fallen sharply over the last month, as Starmer’s downfall became a foregone conclusion. It looks to us like markets are pricing the change and moving on.

So stay cool, and always remember: Markets care about policies, not personalities, and move most on the gap between expectations and reality. Today’s chatter about potential tax hikes and bond market freakouts set the bar low, likely sapping negative surprise potential. UK stocks rising as economic policy proved less bad than feared was a hallmark of the Starmer/Reeves era. More of the same would likely be fine for markets.