The pound sterling is limping toward its worst week in 18 months, as City traders have decided that the prospect of Manchester mayor Andy Burnham potentially challenging Prime Minister Keir Starmer is worse than a cold cup of tea. Sterling dropped almost three cents, or 2%, during the week to $1.336 on Friday, a five-week low. That's the largest weekly drop against the US dollar since Donald Trump's election win in early November 2024 - a moment that apparently still haunts currency markets more than any local politician.
The pound fell against the dollar every single day this week as leadership tensions gripped Westminster, culminating in Burnham announcing he would run for parliament in the north-west constituency of Makerfield. Because nothing says "stable leadership" like a mayor deciding to jump into the Westminster shark tank.
"The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring," said Kathleen Brooks, research director at XTB. "This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting's resignation did not have the same negative effect." So the message is clear: markets prefer a resignation over a Burnham candidacy. Ouch.
UK government borrowing costs also jumped amid a wider sell-off of sovereign debt. The yield on UK 10-year bonds hit almost 5.17%, their highest level since 2008 - above the 18-year high set on Tuesday when pressure was mounting on Starmer after last week's local elections. Thirty-year bond yields also rose sharply, hitting 5.84%, above the 28-year high reached earlier this week. That's a rise of 19 basis points, which is finance-speak for "investors are nervous."
The sell-off in UK bonds reflected concerns in the City that a Burnham premiership might loosen the UK's fiscal rules and increase borrowing to fund higher spending. Investors apparently remember that in January, Burnham said the UK was "in hock to the bond markets" and trapped in "a low-growth doom-loop." He has since softened his stance in interviews, but markets have memories like elephants - or vengeful exes.
Neil Wilson, an investor strategist at Saxo UK, said markets would not like the idea of the Labour party anointing a left-leaning PM whose fiscal views - and his views of the bond market - were well known. "Ultimately the bond market is likely to impose fiscal discipline, but it can get messy before that happens. And the UK's fiscal position gets increasingly fragile every day that the Strait of Hormuz is shut," Wilson added. Because nothing adds excitement to political drama like a geopolitical oil chokepoint.
Mark Dowding of RBC BlueBay Asset Management told clients that Keir Starmer's days in 10 Downing Street were "numbered … and against this backdrop UK financial assets and sterling seem likely to be subjected to an elevated political risk premium for an extended period." In other words, buckle up.
It would take weeks before Burnham is in a position to challenge Starmer, as he must first win a byelection in an area where Reform UK performed well in the local elections, and where the Green party could also contest the seat. The sitting MP, Josh Simons, who is standing down to give Burnham a route back to Westminster, has a majority of just over 5,000 votes. So it's not exactly a coronation.
Bill Diviney, head of macro research at ABN Amro, predicts that uncertainty and speculation of any changes in fiscal policy are likely to fuel volatility in gilt markets. He added that Burnham was popular with the public. "Manchester mayor Andy Burnham is by far the most popular among the general public, and in YouGov polling he is actually the only major politician in the UK with a net positive approval rating," Diviney said. "A factor that would significantly help is if Rachel Reeves keeps her role as chancellor. This would signal continuity and a commitment to her fiscal rules that have kept markets relatively stable." So the markets may be panicking, but the people apparently like the guy. Democracy is weird.