Local Elections Fallout Sees UK Assets Face Up To Fractured Political Future

As the dust continues to settle on Thursday’s UK elections, with counting now essentially over in most parts of the country, it’s clear that the result is a dismal one for the Labour Party.

Not only have Labour lost around 1,400 councillors across England, support appears to have been haemorrhaged on all sides, with Reform and the Greens the big winners on that front. Added to which, Labour have fallen well short in Scotland, while having also lost power in the Welsh Senedd for the first time in 3 decades.

Importantly, though, thus far at least, no senior figure within the Party has called for PM Starmer to move on, or to set out a timetable for his departure. Although a handful of backbench MPs have done so, the Cabinet don’t yet seem prepared to go ‘over the top’, probably reflecting a combination of nobody wanting to be the first to move, as well as there being no especially obvious candidate to replace Starmer if he were to resign. The narrative that’s building appears to be one of, despite the election results being dire, changing the party leader might not do much, if anything, to improve fortunes at the ballot box.

Incidentally, the results are a major complicating factor for Manchester Mayor Andy Burnham. Long talked about as a potential future leader, Burnham’s path back to Westminster, a pre-requisite to stand in such a contest, is now an incredibly narrow one, considering that there are few obvious ‘safe’ Labour seats left, meaning that winning a by-election to make a return to the Commons is now an incredibly high handle. Oh, how must it feel to be in hock to the electorate!

For markets, at face value at least, the lack of any imminent leadership threat likely removes some degree of downside risk for both the GBP, and Gilts, as the trading week gets underway on Monday. In fact, the demand that we saw for the GBP through Friday’s session probably reflects some pricing out of the possibility of an imminent move against Starmer as well.

That said, it increasingly appears as if we might be entering a state of political paralysis, which could well lead market participants, in due course, to ask the question as to whether Starmer remaining as leader is actually a worse outcome than any of the more fiscally profligate potential replacements?

A ‘big speech’ from Starmer is due on Monday, to try and reset the narrative, though within the constraints of the 2024 manifesto, and fiscal rules which give little headroom, especially after the recent sell-off in Gilts, it remains to be seen what Starmer is actually able to do in order to turn things around. In any case, how that speech is received probably determines where the Labour party head next, at least in the short-term.

Zooming out, the results in the round reflect a huge fracturing of what has, for centuries, been a two-party political system here in the UK, with both Reform & the Greens enjoying a huge surge in support, in a clear message of dissatisfaction with both Labour, and the Conservatives.

Mapping local results to a potential general election outcome is a very imperfect science. However, if Thursday’s voting were to be replicated at the next GE, it would likely lead to Reform being by far the largest party in Westminster, but also falling short of obtaining a majority, in turn leading to a hung parliament, albeit with Nigel Farage likely forming the next government.

In any case, there is a long way to go until 2029. And, given the British political landscape of late, a hell of a lot can, and probably will, happen between now and then!