Labour MPs are increasingly likely to move against Keir Starmer after a devastating set of election results, potentially opening the door to a leadership battle that could, ultimately, deliver both a new Prime Minister and Chancellor.
The political turmoil is expected to pile fresh pressure onto gilts and sterling, warns the CEO of one of the world’s largest independent financial advisory organisations.
The warning from Nigel Green of deVere Group comes as Labour suffers punishing losses across England’s local elections, with Reform UK making major gains in former Labour strongholds, and senior figures inside the governing party openly discussing Keir Starmer’s future.
Early results showed Labour losing councils including Westminster, Wandsworth, Hartlepool and Redditch, while Reform UK surged with gains running into the hundreds of seats.
Multiple Labour MPs, it’s reported, went public in the early hours of Friday morning today to call for the Prime Minister’s resignation.
Nigel Green says: “Open season has begun inside Labour, it seems. Election losses on this scale destroy authority, sharpen rivalries and encourage ambitious figures to move as we’re seeing already, with some making not-so-subtle signals towards Number 10.
“Markets will see this as a danger sign.
“Investors are now asking a different question. Attention has shifted away from whether Starmer is weakened and onto whether he survives.
“Bond markets hate uncertainty around fiscal policy and leadership succession. Britain now faces both at the same time.
“Markets remain pretty orderly for the moment because traders are still waiting to see how brutal the final results become and how openly Labour MPs turn on the Prime Minister once counting concludes.
“Calm conditions can change very quickly in Britain’s bond market.
“Britain already carries some of the highest borrowing costs in the G7. Political upheaval layered on top of weak growth, stretched public finances and persistent inflation concerns creates a dangerous mix for gilts.”
Political traders and institutional investors have long memories. The gilt market remains deeply sensitive after 2022’s disastrous Truss ‘mini-budget’.
Any suggestion of disorder around economic leadership, tax policy or borrowing plans risks triggering another aggressive repricing.
“A leadership contest, I believe, would almost certainly produce a new Chancellor alongside a new Prime Minister.
“Financial markets would immediately begin reassessing spending priorities, borrowing assumptions, taxation and relations with business. Sterling volatility would rise sharply under that scenario,” notes the deVere CEO.
“Confidence in the pound rests heavily on international belief that Britain remains fiscally credible. Leadership chaos threatens that confidence.
“Foreign investors require stability, predictability and discipline. Westminster currently offers very little of any of those.”
He continues: “Every rise in gilt yields feeds directly into the real economy. Mortgage holders, businesses seeking loans and taxpayers all feel the effects.
“Britain has entered a far more fractured political era. Traditional party loyalties are breaking apart across multiple regions simultaneously. Financial markets recognise the significance immediately.
Labour’s election losses could “rapidly evolve into a full-scale crisis of authority.”
Some investors are now positioning for the realistic possibility that Britain ends up with both a new Prime Minister and a new Chancellor far sooner than expected.
Nigel Green concludes: “If political infighting within the government accelerates and leadership uncertainty deepens, gilts and the pound are likely to come under renewed pressure as markets reprice risk across the UK economy.”
Most council results are still due later Friday, alongside parliamentary election outcomes in Scotland and Wales, where nationalist parties are expected to perform strongly.