British Prime Minister Starmer says he will not resign after election, Gilt yield eases

Initial results from Friday’s local government elections showed a landslide defeat for Britain’s ruling Labor party, raising questions about Keir Starmer’s future as prime minister.

The Bond Vigilante Group has been closely monitoring the Prime Minister’s fate in recent weeks, and the outcome is expected to fuel further speculation that he could be sacked by his party.

The vote count showed hundreds of Labor MPs lost their seats and many local council leaders were replaced.

Speaking to reporters as results continued to arrive on Friday, Mr Starmer described the results as “very tough”.

“Voters are sending a message about the speed of change and how they want their lives to improve,” he said. “Labour was elected to meet these challenges and I’m not going to walk away…and throw the country into chaos. The five-year term I was elected to serve (and) I’m going to get it done.”

Benchmark yield 10 years British bonds (Gilt) fell 4 basis points to 4.904% by 1:27 p.m. in London on Friday after Starmer insisted he would not resign.

The expected election result will not affect the composition of the Westminster parliament or the change of government, but reflects deteriorating sentiment among voters about Mr Starmer’s leadership.

Labor and its main opposition party, the Conservative Party, are widely expected to suffer big losses, while the right-wing Reform UK and left-wing Greens are expected to make significant gains.

Labour’s backbenchers, who hold no position in the government, reportedly plan to blame the prime minister for the impending loss and demand his resignation.

Deutsche Bank’s analyst team, led by Jim Reid, said in a note Friday morning that the UK will be a focus for investors as the outcome of the election becomes clear.

“Gold prices are focused on whether Prime Minister Keir Starmer will remain in office following the result, so it will be important to pay attention to what Labor MPs and ministers say today,” the source said.

“That is due to the expectation that the new Labor leader may ease fiscal rules and increase the amount of gold issued, and if Mr Starmer’s position is called into question, that would coincide with a sell-off of gold.”

The full results of the election will not be known until Saturday afternoon, but all councils that have held elections are expected to announce their results by then. The Scottish Parliament and Welsh Senedd, which oversee the respective devolved governments, are expected to announce the full results by Friday evening.

Mr Starmer and his Chancellor of the Exchequer Rachel Reeves are locked in an intra-party battle over grievances over fiscal policy, while welfare reform and the appointment of Peter Mandelson, an associate of the late sex offender Jeffrey Epstein, as ambassador to the US have further soured relations between the parties.

But Matthew Amis, investment director at Aberdeen Group, said in a note on Friday afternoon that early election results showed a better outcome for Starmer than investors had expected.

“The gold market has been building a narrative that today could be the beginning of the end for Starmer,” he said. “While this set of results is not positive for Labor, it is not as bad as many market participants feared (so far).”

“At this point, we don’t think these results will trigger a change in prime minister, so the gold market breathed a slight sigh of relief. 10-year gold is down a few basis points on the day, outperforming its G10 peers.”

However, he added that despite today’s positive reaction in gold, “markets will continue to be on high alert for further political turmoil as it does not feel like this political drama is over yet.”

Health minister Wes Streeting, former deputy prime minister Angela Ryder and Greater Manchester mayor Andy Burnham are reportedly the favorites to replace Starmer. Mr Rayner and Mr Burnham (who is currently ineligible to stand for prime minister as he has no seat in parliament) are widely considered to be more left-wing than Mr Starmer.

But the market favors Mr. Starmer and Mr. Reeves holding their positions against potential alternatives, with UK bonds sold off in the past due to uncertainty over their political futures.

Yields on British bonds (known as gilts) soared in July last year after Ms Reeves was seen crying in parliament amid reports that her role in Starmer’s cabinet was at risk. This came after the government reversed course on her proposed welfare cuts following a revolt from Labor politicians.

Earlier this week, gold yields rose to their highest level since 2008 following reports of a post-election coup against Mr Starmer from within his own party.

Bond yields and prices move in opposite directions.

Gold yields fell across the curve on Friday, with 2-year Treasury yields down 3 basis points, while 20-year and 30-year Treasury yields were down 8 and 6 basis points, respectively. Long-term Treasury yields also rose to multi-decade highs earlier this week, pushing 30-year borrowing costs to their highest level since 1998.

Dan Coatsworth, head of markets at AJ Bell, said in a note Friday morning that the 30-year bond yield is a better gauge of political sentiment than the 10-year benchmark rate because the U.K. government typically issues long-term bonds.

“The 30-year government bond is holding steady at 5.628% and was trading at 5.8% earlier this week, compared to 5% just three months ago,” he said.

“Following the election result, there is growing speculation that Keir Starmer will struggle to remain in the prime minister’s office. Bond markets are spooked by the prospect of political change, as the apparent challengers Angela Rainer and Andy Burnham could push for more government borrowing and spending, potentially pushing bond yields further higher.”

Britain already has the highest government borrowing costs in the G7, with yields on 10-, 20- and 30-year bonds above the key benchmark of 5%. Yield effectively represents the interest a government pays to investors for holding its debt.

“Politics really matters for yields,” Freya Beamish, chief economist at TS Lombard, told CNBC’s “Squawk Box Europe” on Friday, adding that it would be difficult for Labor to move to a “growth budget” policy given rising prices and economic constraints.

“Certainly the gold market would react poorly to ‘Let’s spend money to get out of this situation’ without addressing that kind of waste, or ‘Let’s cut taxes’ which is some kind of growth policy. But you can’t just go with a growth policy without addressing… waste on the spending side of the books,” she said.

“And we know there must be some waste there. Even as a percentage of GDP, government spending in many sectors and in many forms is now higher than it was before coronavirus.”

Nigel Green, CEO of financial consultancy De Vere Group, told CNBC early Friday morning that the gold market “pays very close attention to political authority, especially when governments are already facing difficult fiscal conditions.”

“Rachel Reeves is completely tied economically and politically to Starmer,” he said. “If gold yields remain under pressure while Labor absorbs significant electoral losses, investors may begin to judge the government as becoming politically weaker and fiscally constrained.”

Jonathan Merchant, a UK-based Mattioli Woods fund manager, told CNBC there were early signs that “it’s going to be a tough day for Keir Starmer.”

“Given the overnight escalation of tensions in the Middle East and the associated impact on oil and inflation, it will be difficult to disentangle market perceptions of local elections,” he said. “Markets appear to be pricing in a slightly worse Labor result in the run-up to the local elections, with gold yields slightly lower on the move.”

Mr Merchant said Mr Starmer had “remained resolute in recent weeks and is likely to want to continue fighting”.

“In fact, it’s clear that the pace of policy change attempts is going to accelerate,” he told CNBC. “But for markets, the question is: ‘What direction do we go?'” A move further to the left is likely to appease the backbench and thwart internal opposition, which is more advantageous than a change in leadership, but is unlikely to be welcomed by markets. ”