Will the Burnham-Starmer drama spook markets?

Keir thinks it’s all over...it is now. There’s been a lot of drama in Westminster and I thought it worth trying to offer a few thoughts from the City's view. We get used to things quickly but prime ministerial resignations are a big deal. The fact we’re into our seventh PM in 10 years means we are getting a bit anaesthetised to it all. It’s almost exactly 10 years to the day since the Brexit vote – away from the personal aspect of the leadership I think this underlines one key thing: we are yet to see a post-Brexit political and economic settlement in the UK. Fiscally constrained governments – hurt by crisis upon crisis – are unable to act. 

From a financial markets point of view, does this really matter? Clearly there are big implications from big things like the Brexit vote. But changing one soft-left Labour leader promising big change for another? We can boil this down into a simple comparison - will UK assets look less favourable with Andy Burnham as PM than with Keir Starmer as PM?

Firstly, referring to above, markets are kind of used to this by now. Absent any major fiscal loosening it’s hard to see markets being overly spooked by the fact of a change in leader. Gilt yields have ticked down, bank stocks are higher - a smooth transition promised by Starmer is being seen favourably. The fact Wes Streeting has backed Burnham means the coronation should happen swiftly - another positive for markets.

What of the substance? Is there anything markedly different to expect from Burnham?

There is clearly a sense that Burnham is the ‘least market friendly’ option for Labour. A lot will ride perhaps on who he picks for the role of Chancellor. He's spoken about bond markets in a way to unnerve investors but has since very much dialled down the rhetoric. More borrowing would make gilts less attractive and sterling could suffer. The biggest tail risk for UK assets would be if an emboldened Burnham (And why not be bold given the momentum?) makes “brave” decisions (to borrow from Sir Humphrey) on tax and spending. 

So, while the temptation to be “brave’ may win out, equally, there are limits. Fiscal constraints remain whoever is the PM/executive. I doubt any new continuity candidate (no new manifesto/election) can do anything to boost growth in the near to medium term...looser fiscal policy would be punished by markets and I think Burnham will be keen to avoid the headlines in his first 100 days being driven by the markets, particularly unfavourable gilt market reactions, which lead to higher borrowing costs and constrain his ability to act.

We may see some loosening at the edges, but Burnham has been keen to dial down big spending promises that would require extra borrowing. Professor Rob Ford at Manchester University (cited in the FT) noted that Burnham was adopting an approach of “big spending vibes, small spending commitments”.

The advantage of this approach in the short and medium term is selling the “big spending vibes” to the voting public whilst simultaneously selling the “small spending commitments” to the market. The risk in this approach is repeating the mistakes of the Starmer regime – big promises that are undeliverable, leading to disappointment and a loss of power, credibility and confidence.

It’s important to note he's still working on his offer/plan...there could be some surprises in store. Burnham has dialled down his fiscal rhetoric of late but could be minded to lurch leftwards once in power. My bet is that Truss PTSD remains at the forefront of his mind and he will not seek out trouble with markets.

For me the big question is over who is the Chancellor - soft left (Miliband/Haigh) or the 'soft right' of the party (McFadden or Streeting perhaps) - see potential for market reaction to this appointment.

But coming back to the original point - fiscal constraints and bond markets remain the same – Burnham's hands are tied and he’ll end up tinkering with taxes, hurting growth and remaining in hock to bond vigilantes.