Markets punish Starmer over ‘reset’ speech

UK markets reacted negatively to Prime Minister Keir Starmer’s high-stakes “reset” speech on Monday, with gilt yields climbing sharply and sterling weakening on the back of devastating local election losses. Starmer’s speech came at one of the most precarious moments of his premiership, with senior Labour figures openly questioning strategy, authority and direction after the party suffered heavy electoral setbacks, intensifying fears over leadership stability and the future of the government’s economic agenda. “Financial markets are now treating UK political risk as a major factor driving asset prices,” said Nigel Green, CEO of leading independent financial advisory deVere Group. “The UK 10-year gilt yield surged toward the critical 5% level during the speech, while 30-year gilt yields climbed even more aggressively further above 5.6%, signalling deep concern over Britain’s long-term fiscal outlook,” he said. “At the same time, the pound weakened against the dollar as traders cut exposure to UK assets and moved toward traditional safe havens.” Green explained that the PM’s speech was supposed to reset the political narrative after the elections. Instead, financial markets are signalling deep anxiety about where Britain goes from here. “Investors are looking at a prime minister fighting for his political survival after severe election losses, while simultaneously trying to convince markets that fiscal discipline remains intact. “This combination immediately raises the temperature in bond and currency markets.” The local election results, that saw Labour lose significant councils to Nigel Farage’s Reform Party and to the Green Party, triggered intense political fallout across Westminster, with critics inside and outside the ruling party arguing that Starmer has failed to reconnect with voters on growth, living standards, immigration and economic confidence. The political damage has rapidly spilled into financial markets because investors fear prolonged instability could weaken the government’s ability to maintain spending restraint at a time when the debt burden remains elevated and borrowing costs around the world are under pressure. “Bond traders want clarity, authority and discipline from Starmer’s government,” the deVere CEO noted. “Investors start questioning whether difficult fiscal decisions can still be delivered. Once that process begins, yields move higher very quickly.” Underperforming US Treasuries, Bunds The reaction in gilts is particularly significant because long-dated UK government bonds are underperforming both US Treasuries and German Bunds, highlighting that investors are attaching a distinct UK-specific political risk premium to British assets. The pound also weakened against the dollar, retreating as investors sought safety in the greenback amid wider global volatility linked to geopolitical tensions and surging energy prices. “The FX market is reflecting concern that Britain could enter a prolonged period of political instability just as inflation risks, higher oil prices and elevated interest rates are already creating a difficult backdrop for economies worldwide,” Nigel Green explained. “Markets are increasingly concerned that if political pressure intensifies further in the UK, fiscal policy could loosen as politicians attempt to regain public support after the elections. “This is exactly the scenario bond investors fear most: rising borrowing, weaker fiscal discipline and political fragility all arriving at the same time.” The 5% level on the 10-year gilt yield is being watched extremely closely by traders because of comparisons with the turbulence seen during the 2022 gilt crisis following Liz Truss’s mini-budget. “Nobody’s arguing this – yet – is a repeat of the Truss 2022 drama. But markets have long memories,” Green warned. “Investors remember how rapidly confidence deteriorated once doubts emerged over Britain’s fiscal direction. Any signs of political instability combined with concerns over spending immediately trigger sensitivity in UK debt markets.” “Britain depends heavily on international investors to finance its debt. Global capital does not wait patiently for political problems to be resolved. “If investors believe instability is rising or fiscal credibility is weakening, they demand higher returns immediately. That is exactly what we are seeing in the gilt market today.” The post Markets punish Starmer over ‘reset’ speech appeared first on Financial Mirror.