UK Markets Rebound as Starmer Quashes Fears of a Reeves Exit

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(Bloomberg) -- UK markets rebounded from a sharp selloff as Prime Minister Keir Starmer sought to calm speculation about a possible exit by Chancellor of the Exchequer Rachel Reeves.

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Bond and equity markets recovered some of their losses from a slump triggered by concern a new chancellor might usher in increased borrowing. In a BBC interview late Wednesday, Starmer gave Reeves his full backing and the chancellor later reiterated the government’s commitment to its fiscal rules in an unscheduled TV appearance.

The yield on 30-year bonds fell as much as 12 basis points to 5.30% after a 19 basis point jump on Wednesday, the biggest increase since April. It pared the move following a stronger-than-expected US jobs report.

“The market has been really reassured by Keir Starmer’s words,” said Henry Allen, macro strategist at Deutsche Bank AG.

But the concerns around fiscal stability that were ignited by the episode haven’t fully died down, potentially setting UK markets up for a volatile summer ahead of the Autumn budget. The uncertainty about Reeves came after Members of Parliament from Starmer’s ruling Labour Party forced him to scrap £5 billion ($6.8 billion) worth of cuts to welfare spending, making it harder to tame the budget deficit.

“The combination of low growth and high debt interest cost implies difficult fiscal choices,” said Morgan Stanley Chief UK Economist Bruna Skarica, who added the government will likely have to pursue tax increases. “The UK has a very short lifespan of its fiscal rules. Hence, market participants see this as a live risk.”

In the BBC interview late Wednesday, Starmer gave Reeves his full backing, hours after failing to guarantee her position when asked in parliament. “She and I work together, we think together,” he said, adding, “We’re in lockstep.”

Starmer reiterated that message in comments to a UK radio station and other appearances on Thursday. He declined to comment directly on the recent market moves.

The pound led Group-of-10 gains before the US jobs data sent the dollar surging against all major peers. UK stocks climbed, outperforming European peers.

Wednesday’s selloff evoked echoes of the UK’s market crisis in 2022, when Prime Minister Liz Truss was swept from power after her calamitous mini-budget rattled the confidence of investors and sent borrowing costs soaring.

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The jump in long-term bond yields was the third biggest since the Truss episode, with only the wild swings around Trump’s “Liberation Day” in April taking a bigger toll.

What Bloomberg strategists say...

“The bond market may welcome clarity around Reeves given her vow to adhere to self-imposed fiscal rules. The prospect of a replacement being less inclined to stick to those rules fueled the selloff.

But the government faces a tough set of choices nevertheless, which means that the risk premium that is now embedded into UK assets won’t be fully unwound just yet.”

— Ven Ram, macro strategist, Dubai. For the full piece, click here.

The gilts move on Wednesday was sharp enough to spill over into US Treasuries, the world’s largest bond market, which is dealing with fiscal concerns of its own as President Donald Trump’s massive tax and spending package advances through the House.

The UK 10-year gilt yield, which rose 16 basis points yesterday, fell as much as 10 basis points to 4.51% prior to the US jobs data.

“The gilt market will remain very sensitive to any signs of political or fiscal weakness in the months ahead,” said Chris Iggo, CIO for core investments at AXA Investment Managers. “Markets sense that abandoning the fiscal rules might become politically tempting.”

--With assistance from Naomi Tajitsu, Ellen Milligan and Alice Atkins.

(Updates prices throughout.)