UK markets digest political turmoil as Starmer faces pressure

​​​Political uncertainty drives bond and currency moves

​United Kingdom (UK) government bonds sold off as investors reassessed political risk following the resignation of Prime Minister Keir Starmer's chief aide. Gilt yields rose around 2 basis points across the curve, reflecting renewed concerns about stability in Westminster.

​Sterling bore the brunt of the political jitters, falling to its weakest level against the euro since January. The British pound dropped approximately 0.5% against the single currency, while also slipping modestly against the United States (US) dollar.

​The moves extend recent losses for sterling, which had already weakened following a more dovish stance from the Bank of England (BoE). Combined with domestic political uncertainty, the currency faces multiple headwinds.

​Betting markets now assign a greater than 70% chance that Starmer leaves office by year-end. This speculation adds another layer of uncertainty for UK assets, though the reaction has been relatively measured compared to previous political crises.

​FTSE 100 rallies despite domestic headwinds

​UK equities shrugged off domestic concerns, with the FTSE 100 and FTSE 250 both posting gains in line with broader European markets. The rally was driven by a risk-on global backdrop and firmer commodity prices.

​Miners led the advance as metal prices strengthened, providing support to the resource-heavy FTSE 100. Banks also contributed to the gains, while defence stocks benefited from continued geopolitical tensions and elevated spending commitments.

​The disconnect between currency weakness and equity strength highlights the international nature of the FTSE 100. With around 75% of revenues earned overseas, a weaker British pound can actually boost profits for many constituents when translated back into sterling.

​The FTSE 250, more exposed to the domestic economy, also rallied despite the political noise. This suggests investors are looking through near-term Westminster drama and focusing on broader market drivers including interest rate expectations and corporate earnings.

​NatWest deal sparks shareholder concerns

​NatWest shares fell sharply after the bank agreed to acquire wealth manager Evelyn Partners for £2.7 billion. The deal represents NatWest's largest acquisition in over a decade and marks a significant strategic shift into wealth management.

​Analysts flagged potential pressure on near-term share buybacks as the bank digests the acquisition. NatWest has been returning capital to shareholders through buybacks funded by the government's ongoing stake reduction, a programme that may now face disruption.

​Despite the strategic fit, the market reaction suggests concerns about execution risk and the premium paid. Wealth management deals have a mixed track record in banking, with integration challenges often proving more difficult than anticipated.

​The acquisition adds approximately 186,000 clients with £58 billion in assets under management. While this expands NatWest's footprint in the attractive wealth segment, investors will need convincing that the price tag represents value.

​Labour market shows tentative signs of stabilisation

​A hiring survey provided early signs that the UK labour market downturn may be easing, despite higher employment costs. Permanent recruitment continues to decline, but at the slowest pace in 18 months.

​The data suggests employers are adapting to elevated wage bills following recent increases in employer National Insurance contributions. While hiring remains subdued, the pace of deterioration has slowed markedly from late 2024.

​This tentative stabilisation matters for BoE policy. The central bank has expressed concern about wage growth and employment costs, viewing them as key determinants of inflation persistence.

​However, a single survey doesn't make a trend. Further labour market data will be needed to confirm whether this represents a genuine turning point or merely a temporary pause in the downturn.

​What it means for traders

​The divergence between UK assets tells a nuanced story. Sterling and gilts reflect domestic political concerns and dovish BoE positioning, while equities benefit from global risk appetite and commodity strength.

​For forex traders, sterling weakness may present opportunities, particularly against the euro where the gap has widened significantly. Political uncertainty could keep the pound under pressure in the near term.

​Equity traders might view FTSE weakness on political headlines as buying opportunities, given the index's international revenue base. The disconnect between domestic politics and corporate earnings creates potential mispricings.

​Bond traders face a more complex picture. While political uncertainty typically drives safe-haven flows into gilts, the UK's fiscal position and inflation backdrop limit this dynamic. Higher yields may persist even as political noise fades.