Volatility in the market reflects ‘fear of what comes next’ as Starmer resigns  

The expectation of the Prime Minister’s resignation in recent days had already driven volatility in financial markets – a spike in bond yields and fall in sterling this morning shows that his resignation is only adding to that.

This is not because of any great love the markets have for the outgoing PM, but for fear of what comes next.

Investors are now focusing on what an Andy Burnham premiership will look like. The volatility in the market reflects that perhaps not even Mr Burnham knows what this looks like.

Initially offering himself as a more fiscally expansionary alternative to Prime Minister Starmer, in recent weeks he has dialled back some of his suggestions for increased public spending – in areas such as compensation for WASPI women – and committed to maintaining the current fiscal rules.

Who he chooses to form his economic team, particularly his choice as Chancellor, will also be crucial. This makes it difficult to predict the policy direction of his government.

Investors will be focused on policies related to taxation, government borrowing, public spending, and regulation, and less on the personality of the next PM.

Government bond yields would initially rise if markets reacted negatively to any plans that breach the Chancellor’s fiscal rules to fund higher borrowing for public sector investment or the expansion of public services. But if any revised fiscal plans look credible and have a clear, well-defined strategy to spur economic growth, yields will stabilise quickly. In tandem, sterling is likely to be hit by some volatility for a while as investors reassess the UK’s political and economic direction.

For businesses, much will depend on whether the next administration can deliver policy certainty. If the next PM can convince financial markets that a clear, long-term investment plan will be implemented and that there is a strong, well-funded path to sustainable growth for the UK, then business confidence will increase. This confidence boost is likely be most notable in sectors such as construction, transport, green energy, and regional development.

The next PM must combine ambition with fiscal discipline. Achieving this balance could make investors welcome a more predictable, growth-oriented policy environment.