Starmer states "absolutely will not resign": UK bonds rebound in response as markets bet the "worst-case scenario" has passed

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Preliminary results of the UK local elections show that the Reform Party has seen a sharp increase in seats, while both Labour and the Conservatives have lost ground, further fragmenting the political map. Prime Minister Starmer has made it clear he will not resign, temporarily stabilizing the bond market, but market concerns persist.

On May 8th, according to Bloomberg, with roughly one-third of local councils in England counted, the Reform Party has gained more than 300 seats, Labour has lost over 200 seats, coming close to losing half of its defended seats. Starmer admitted the results are "very tough," but stressed he will not step down and will continue to lead Labour until the next general election.

The market responded swiftly. The yield on Britain's 30-year government bonds fell by 8 basis points to 5.55%, and the pound rose 0.5% against the dollar to 1.3616. This means the worst-case scenario previously feared by investors—“Starmer stepping down, Labour shifting toward fiscal loosening”—has been temporarily ruled out.

However, despite the market’s brief respite, the underlying issues facing British assets have not been substantively alleviated. The rapid rise of the Reform Party, growing internal dissent within Labour, and renewed risks of fiscal expansion all add to the ongoing accumulation of political and fiscal uncertainty in the UK.

Rapid Expansion of the Reform Party, Traditional Two-Party System Further Loosened

The results of this local election further confirm deep changes in the UK's political structure.

The Reform Party not only made breakthroughs in traditional Conservative strongholds, but also began to enter areas long dominated by Labour, taking control of Newcastle-under-Lyme Council and winning Havering in London for the first time. Nigel Farage, current leader of the Reform Party, said Friday in London: "You are witnessing a historic change in British politics."

The Conservatives suffered a heavy blow, losing more than a quarter of their seats; the Green Party nearly doubled its seats, and the Liberal Democrats also saw gains. Professor John Curtice of politics at the University of Strathclyde said: “The past few hours have fully demonstrated and showcased the fragmentation of British politics.”

Against the backdrop of steadily worsening local election results, the market once worried about possible leadership turmoil within Labour. Prime Minister Starmer quickly made a public statement declaring he would not resign and would not let the UK “fall into chaos.” This statement rapidly stabilized market sentiment, ending the continuous rise in the yield of Britain’s 30-year government bonds. Earlier this week, the yield had hit its highest level since 1998.

Gordon Shannon, a fixed-income portfolio manager at TwentyFour Asset Management, commented that Starmer’s statement “has bought him time," but whether he can persist until the next general election remains highly uncertain.

The Market's Real Concern: Potential Relaxation of Fiscal Discipline

The core of the recent volatility in UK asset prices is not the election results themselves, but the direction of fiscal policy.

Investors fear, if Labour turns to more aggressive fiscal spending under electoral pressure to win back lost voters, then against the backdrop of persistent inflation and limited fiscal space in the UK, long-term financing costs may rise further.

Bloomberg economists Dan Hanson and analyst Antonio Barroso warn that these local elections could trigger a political chain reaction. If Starmer is replaced by a new leader leaning toward fiscal loosening in the future, contradictions between UK fiscal policy and the bond market could intensify.

Risk Warning and DisclaimerThe market involves risk; investment should be cautious. This article does not constitute personal investment advice and does not take into account individual users’ unique investment goals, finances or needs. Users should consider whether any opinions, perspectives or conclusions in this article suit their particular situation. You invest accordingly at your own risk. ```