Following yesterday’s resignation of Keir Starmer, Jonathon Marchant, Fund Manager at Mattioli Woods, shares his insights on the Labour leadership race, and how it might impact gilt markets.
After a landslide win at the Makerfield by-election, Andy Burnham is almost certain to become the seventh Prime Minister in ten years. However, Burnham is something of an unknown quantity, with the added dimension of not being elected as an MP on the original Labour manifesto.
His ‘Manchesterism’ platform, which advocates deeper devolution, greater public investment and an explicit rejection ‘neo-liberalism’ – interpreted as centre-right politics –, rattled bond markets sufficiently to push 30-year gilt yields to 5.81% in early May, their highest since 1998.
Yet he has since moved to reassure markets, pledging to retain Reeves’ fiscal rules, consulting the former OBR chair and ex-Bank of England chief economist and framing low growth as the true threat to sovereign debt sustainability. The gilt market’s muted response to his Makerfield victory suggests investors are prepared, cautiously, to take him at his word.
Interestingly, UK bond yields finished the day yesterday lower, suggesting some degree of comfort with the circumstances. This is likely related to the decision by Wes Streeting to back Andy Burnham, reducing the risk of splitting the party, which may have forced Burnham to pursue policies to win over the left of the party.
However, we remain in the foothills of the leadership contest and whether bond market patience survives a full leadership campaign, with its inevitable spending pledges and membership pressure, is another matter entirely for a market already demanding a premium to finance UK borrowing.
Markets appear more interested in who may join him as Chancellor. It is reported that Rachel Reeves is unlikely to be kept on in the role and there appears to be a plethora of options. Yvette Cooper would likely be the gilt market’s preferred choice, with her masters in economics and previous experience at the Treasury.
Pat McFadden’s leaked fiscal scepticism plays well with gilt holders, while Wes Streeting, having thrown his support behind Andy Burnham will be expecting a big role and is broadly seen as a centrist option and will be the most likely option. Ed Miliband sits at the other end of the spectrum and net zero commitments raise concerns around fiscal spending and inflationary pressure. Concern around a Miliband Chancellorship appears to be shared by markets and trade unions, with the boss of Unite launching a strongly worded attack over the weekend.
Any incoming Prime Minister will quickly discover that the fiscal inheritance offers precious little room for manoeuvre. Raising spending in one area almost inevitably means cutting it in another or reaching further into the taxpayer’s pocket. For a gilt market already extracting a premium to fund sovereign borrowing and quietly pricing in rate rises before the year is out, the name above the door at Downing Street is of course consequential. It is, however, the figure occupying the seat next to them at the Cabinet table who will determine whether markets retain their fragile composure.
