UK Risk Spreads Oddly Calm As PM Starmer Faces Growing Threat Of Ouster

Wes Streeting is reportedly poised to resign as UK health secretary and launch a formal challenge to UK PM Keir Starmer in a Labour Party election.

Following a meeting with Starmer in Number 10 (which lasted just 16 minutes), an “ally” of the health secretary told The Times that Streeting was “going to go for it”.

Around 100 Labour MPs have publicly called for Starmer to resign although a similar number of lawmakers have urged challengers to hold back from launching a leadership bid.

Starmer’s leadership is hanging by a thread after Labour lost nearly 1,500 councillors across English councils and were defeated by nationalist parties in Wales and Scotland.

A slew of ministerial resignations have so far failed to force Starmer’s downfall this week.

As Bloomberg reports,s everal allies of Streeting have been among those to say he should go, leading lawmakers to conclude that he is attempting to build pressure against the premier ahead of announcing a challenge.

“I think it’s being a bit over dramatized,” Starmer loyalist Nick Thomas-Symonds said on BBC Radio 4 on Wednesday, ahead of Starmer’s meeting with Streeting.

“Anyone would think we were talking about the final scene at Casino Royale or something.”

Trade unions have joined the calls for change.

“It’s clear that the Prime Minister will not lead Labour into the next election, and at some stage a plan will have to be put in place for the election of a new leader,” unions affiliated with the party said in a statement published Wednesday morning.

In a statement alongside the King’s Speech this morning, Starmer said the country stood at a “pivotal moment”.

He said multiple crises had meant that the “status quo had repeatedly made working people pay the price”.

“This time must be different. And this King’s Speech shows it will be different with a plan to make this country stronger and fairer.”

Starmer’s move was seen as effectively daring his opponents to come out and publicly challenge him, a position that his deputy, David Lammy, put voice to in Downing Street on Tuesday evening.

“It’s been 24 hours now, and nobody has come forward to put themselves forward in the processes that exist in the party,” Lammy told reporters.

“No one seems to have the names to stand up against Keir Starmer, and for those who are suggesting that he should stand down, they should say which candidate would be better.”

Interestingly, the odds of a Starmer resignation in the short-term (by the end of May) have tumbled...

...while the odds of him leaving by year-end have soared...

And while the UK is in the midst of a political crisis that could see off its sixth Prime Minister in only a decade, Bloomberg's Simon White notes that risk spreads are remarkably contained.

A measure including UK asset swap spreads, gilt spreads, bank CDS, sterling, etc, is only modestly wider and is below where it was on the outbreak of the Iran war, Chancellor Rachel Reeves’ first budget, and the ill-fated, short-lived premiership of Liz Truss.

Gilt yields are indeed higher, and are so across the curve, which is suggestive of extra risk premium for holding UK debt.

“I am underweight gilts,” said Shinji Kunibe, a portfolio manager at Sumitomo Mitsui DS Asset Management Co. in Tokyo.

“Yields have already risen beyond Truss-era levels, so they’re attractive if we see any positive signals. But with so much uncertainty, I doubt anyone is willing to touch gilts right now.”

However, that has happened to other countries too - albeit to a lesser extent - due to the energy shock, muting the spread impact on the UK.

“I’d love to buy them because obviously long-end yields are so enticing on paper,” the chief multi-asset strategist at HSBC said in an interview on Bloomberg radio.

But with a potential challenge to Prime Minister Keir Starmer’s leadership keeping volatility high, “right now, gilts are a half-hour trade.”

There is also perhaps a hope that in the gilt market that the potential replacements for Keir Starmer are beginning to preach greater fiscal orthodoxy, if recent political commentary is to be believed.