UK markets edged lower after Sir Keir Starmer announced his resignation as prime minister, with investors reassessing the outlook for Britain’s economy as Westminster entered a new period of political uncertainty.
The FTSE 100 slipped from 10,360.29 at 9.30am to 10,351.12 by 10.00am, giving up earlier gains as traders weighed the implications of a Labour leadership contest and the potential impact on government spending, borrowing and fiscal policy.
Sterling also weakened, falling 0.3 per cent against the US dollar to $1.319 and slipping 0.1 per cent against the euro to €1.152. The pound has already lost around 3 per cent against the dollar since February as investors balance political uncertainty with concerns over Britain’s growth outlook.
The market reaction was relatively contained, but analysts warned that investors would be watching closely for signs of a change in economic direction.
Andy Burnham has emerged as the leading figure in the race to replace Starmer after securing victory in the Makerfield by-election, a result that strengthened his position within Labour and fuelled speculation about a possible leadership challenge.
Markets are now focused on whether a new Labour leader would maintain the government’s current fiscal approach or signal a shift towards higher spending and increased borrowing.
Mohit Kumar, analyst at Jefferies, suggested that Starmer’s resignation could create a smoother transition for Burnham, reducing some immediate uncertainty while leaving longer-term questions unresolved.
The political turbulence comes as investors remain sensitive to Britain’s debt position and public finances. UK government borrowing costs eased slightly on Monday, with the yield on 10-year gilts falling from 4.84 per cent to 4.82 per cent.
The move followed reports of progress in US-Iran discussions over the Strait of Hormuz, which helped reduce broader geopolitical concerns. However, UK borrowing costs remain elevated compared with levels before Burnham’s by-election victory, when the 10-year gilt yield stood at 4.76 per cent.
Britain’s bond market has also underperformed relative to other major European economies. Earlier in the month, UK borrowing costs rose faster than those of France, Germany, Italy and Spain as investors expressed concern that higher spending commitments could add pressure to the country’s near £3tn debt burden.
The resignation also drew international attention, with US President Donald Trump commenting on the political situation and linking Starmer’s difficulties to issues including immigration and energy policy.
For investors, however, the central question remains economic rather than political: whether the next Labour administration can restore confidence over growth, borrowing and long-term fiscal stability.
Until greater clarity emerges over the leadership contest and future policy direction, UK markets are expected to remain trapped in a cautious trading range, with political risk becoming an increasingly important driver of sterling and domestic assets.
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