UK assets will be back in focus on Friday after a shock loss for Labour in the Gorton and Denton by election. The Labour candidate came third, with the Greens winning a decisive victory against both Labour and Reform. Gilts and sterling will need to digest the long-term ramification of this byelection result, including whether it means the radical left are gaining inroads into the UK’s political ecosystem, and added to this, what does it mean for the future of Kier Starmer as prime minister.
After initially rallying early this morning, the pound is making fresh lows and is testing $1.3450, it is now the weakest currency in the G10 FX space on Friday and is the second weakest in the G10 this week. Although political risks are front and centre, the sell off in the pound is mild so far. Interestingly, Gilts outperformed on Thursday, and yields fell sharply.
Why Starmer could be safe for now
Earlier this month, speculation that Starmer could be usurped by someone within his party did cause some volatility in the Gilt market, however, this was quickly resolved after members of the UK cabinet stepped in to support Starmer as PM. While there are likely to be calls for Starmer to go from within his own party, we do not expect the Labour bigwigs, or the cabinet to join them.
We do not think that Starmer will go on the back of this result. Who would want to depose Starmer and then face the Spring Statement next week? Added to this, his potential successors, including Wes Streeting and Angela Raynor have problems of their own. Streeting could face a Green uprising in his own constituency, and Raynor still has the stamp duty scandal hanging over her. Already this morning, cabinet members have said that this result should not be overinterpreted, which is a sign that Starmer could be safe for now.
Why copying the Greens may not work for Labour
There will be calls for Labour to move even further to the left after this result, however, Gorton and Denton is only one area, and it is not representative of the whole country. It is not clear that a shift left would benefit the Labour Party in the upcoming May elections. The economy is still the biggest issue facing the country, according to the latest YouGov data, and more left-leaning policies may not alleviate rising unemployment, especially in the young.
Why this result may not trigger excess volatility for the Gilt market
While this result is definitely a test for the Gilt market, we do not think that it will trigger excess volatility at the end of this week. The aftermath of the May election results are more important, in our view. Added to this, there is speculation that next week’s Spring Statement could see the OBR slash its forecast for Gilt sales this year after bumper tax receipts at the start of this year. This could have an ameliorating effect on yields in the coming days and limit any spike in yields on the back of the byelection loss for Labour.
Watch GBP/USD and the 200-day sma
The pound is weaker across the board today, although the results of the byelection have not caused a rout in sterling so far. GBP/USD is testing the water around the 200-day sma at $1.3447. If the pound falls through this level then this would be a major technical breakdown and a sign that momentum is to the downside.
Netflix set to surge after ditching WB bid
Futures markets in Europe are pointing to a stronger open on Friday, after another week where European indices are set to outperform their US counterparts. Netflix will be in focus after it announced that it was dropping its bid for Warner Bros Discovery. The stock price surged 8% in the post-market on Thursday night and it could claw back most if not all of its 10% YTD loss. European inflation data is also worth watching today, and France will be in focus to see if CPI can rise after a large decline at the start of the year.
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