Keir Starmer resigns: What investors need to know

British Prime Minister Keir Starmer announced on Monday that he would resign, opening the door for the country’s seventh leader in a decade.

The process of choosing his successor as Labor Party leader and Prime Minister will see him take power by September 1 at the latest, with a new set of economic and fiscal policies announced for markets to digest.

Here’s what investors need to know as the UK searches for its next leader.

First, the vanguard.

Andy Burnham is considered the likely candidate to replace Starmer. The Mayor of Greater Manchester gained leadership status after winning a seat in the UK Parliament in a special election last week.

On Monday morning, former health secretary Wes Streeting, a potential rival in the prime minister’s race, endorsed Burnham, raising the possibility that he will run unopposed, but that would significantly speed up the process.

Mr Burnham served in successive Labor governments, and after contesting the leadership election in 2015, left parliament to become mayor of Manchester in 2017.

The prominence afforded him by the mayorship and his detachment from the intrigues of Parliament earned Burnham the nickname “King of the North.”

He is seen by onlookers to be to the left of Mr Starmer, and his past comments on public spending have worried investors.

“We have to get out of the bond market’s grip on us,” he said in an interview in September last year, which led to a plunge in British government bonds, and traders had already seen him as a potential candidate for prime minister.

He later recanted that statement. “I have never said we can ignore the bond market,” he told ITV News in May.

Writing for CNBC in May, Ian King recalled an interview with Burnham in which he trashed his “Manchesterist” style of economic management.

Freeing government spending from bond market constraints could prove more difficult than Burnham expected, especially as Britain’s fiscal situation continues to deteriorate.

Yields on British bonds (known as gilts) have soared on signs of increased government spending. If Mr Burnham becomes prime minister, he will inherit the same cash-strapped government, which will limit its ability to make big spending.

April Larousse, head of investment specialists at Insight Investments, said in a note that yield trends could focus on the manner in which Starmer leaves office, rather than his successor’s policies.

“Recently, the gold market seems to be expecting a more pragmatic approach to government policy changes,” she says.

“Going forward, we expect the market focus to be on who is chosen for key cabinet positions, with gold markets most interested in the chancellor and the likely timing of the next budget.”

Combera said Burnham’s move to 10 Downing Street was “well anticipated and heavily priced in”, so the British pound was unlikely to move.

“A well-defined transition is likely to be seen as orderly,” Convera currency strategist Antonio Ruggiero said in a note.

“Downside risks lie in a more chaotic path. Further pressure on the pound could re-emerge if no timeline is provided and attention shifts to leadership challenges that could force resignations.”

Monetary policy is the biggest concern for the pound, with markets expecting the Bank of England to keep interest rates unchanged for the rest of the year.

How bond markets and the pound react to the new prime minister will depend on the choice of the finance minister, known in Britain as the prime minister. Current Prime Minister Rachel Reeves could be a low-risk option by suggesting continuity, but she will reportedly be ousted.

Media reports in recent days have mentioned former health minister Streeting and energy minister Ed Miliband, who led the party from 2010 to 2015, as possible candidates.

“Bond investors will be quick to judge whether the new chancellor is a cautious or adventurous type,” Dan Coatsworth, head of markets at AJ Bell, said in a note.

“The bond market wants someone who is cautious and determined to make ends meet. They don’t want someone who is going to spend more and more without really thinking about whether the country can afford it.

“Equity investors will be hoping for a more pro-business chancellor than Mr Reeves, who has led significant cost pressures on British industry over the past two years.”

A change in leadership does not automatically lead to a change in a country’s economic fortunes.

The International Monetary Fund warned in April that Britain could suffer the biggest hit to growth among major economies from the Iran war, forecasting growth of just 0.8% in 2026, down from the 1.3% forecast at the start of the year.

Indriatti Van Hien, a fund manager at Henderson Small Companies, wrote in response to Starmer’s resignation: “The prime minister may change, but the challenges facing the UK economy remain the same.”

“The next Chancellor faces the unenviable task of restoring economic growth while walking a fiscal tightrope. He will need to tackle energy policy and welfare reform to reduce the UK’s gold yield premium, free up capital for growth and ultimately bring capital flows back to the UK.”