𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

Andy Burnham’s first week as Britain’s fifth prime minister in four years has passed with a relatively calm market reaction, but early signs of unease are already visible. UK government bonds have extended a sell-off that began at the start of the month, with the 10-year gilt yield rising above 5% for the first time since May. Sterling has also eased closer to $1.33 against the dollar.

Matthew Ryan, CFA, Head of Market Strategy at Ebury, sets out five issues investors should monitor closely under the new premiership.

The biggest surprise of the new cabinet was the appointment of John Healey as chancellor. Mr Ryan said the move had been received positively by markets.

He said: “The appointment of John Healey as Britain’s next chancellor has been greeted rather well by markets. On paper, Healey sits to the left of Mahmood, with a track record of pushing for higher spending on defence and housing. But scratch the surface and he remains firmly soft-left: fiscally responsible and committed to working within the fiscal rules – a generally safe pair of hands.”

Mr Healey’s previous Treasury experience under Tony Blair and Gordon Brown means he is not walking into the role completely cold. Yet Mr Ryan highlighted a clear contradiction. Only last month, Mr Healey resigned from the cabinet, demanding a bigger defence budget and the issuance of war bonds.

The key question for markets is whether those expansionist views will follow him into Number 11 or whether the constraints of the job will force him to set them aside.

Mr Burnham’s most striking early comment was that he would seek “flexibility” around the fiscal rules. Mr Ryan said markets were treating the remark as a red flag and viewed it as a potential euphemism for higher borrowing.

At the least, Mr Ryan argued, it signalled that Mr Burnham may try to keep certain spending, such as defence, outside the formal parameters without technically breaking the rules. With government debt around 100% of GDP, borrowing costs higher than any other G7 nation and interest payments already absorbing 8% of total government spending, the room for error is minimal. Any perceived loosening of discipline risks further selling of UK assets.

Mr Ryan identified this year’s Autumn Budget as a major catalyst for UK assets, saying: “This year’s autumn budget is set to be a major catalyst for UK assets. The core tension for Labour is that they are stuck between appeasing and winning back voters on the one hand, while keeping the bond market onside on the other – never an easy task.”

Mr Burnham has already delivered low-cost, high-visibility cuts to electricity VAT, bus fares and pub tax rates. While popular, these moves have left investors asking how they will be funded and whether they pave the way for further tax rises or extra borrowing later.

Mr Ryan noted that Mr Burnham intends to stick to a key Labour manifesto pledge.

He explained: “Importantly, of course, is that Burnham intends to stick to one of the key Labour manifesto pledges – ie no increase to the ‘big three’ rates of taxation. If he honours such a pledge, it should lend some near-term credibility with markets. Yet it also narrows his fiscal options considerably, and could push the revenue-raising burden onto less politically salient areas such as property, wealth and business taxation.”

Reports suggest Mr Burnham is considering replacing council tax and stamp duty with an annual levy based on property values. Such reforms, however, typically take years to bed in and may not deliver the quick fiscal gains Labour needs.

Support for Labour has improved in the polls since Mr Burnham took office. Mr Ryan said that if the trend continues, the new prime minister could yet consider seeking his own mandate while political conditions remain favourable.

Bookmakers currently price in roughly a 12% chance of an election in 2026 and a 27% chance in 2027. Mr Burnham has played down the prospect, but Mr Ryan argued it should not be dismissed entirely if Labour’s polling continues to firm.

Mr Ryan has argued for several weeks that the pound is not adequately pricing the risk associated with the new premiership:

He said: “As we’ve been saying for a number of weeks now, we do not think that the pound is adequately pricing in the risk premium associated with the Burnham premiership. We’ve seen some relief buying of UK assets of late, which we think is somewhat justified – Burnham’s pledge to stick to the fiscal rules and the appointment of Healey rather than say an Ed Miliband-type figure are reassuring signals for markets.

“We are sceptical that this will hold, however, given that Burnham’s instincts point towards the type of tax, borrow and spend policies that investors have historically balked at.”

With wafer-thin fiscal headroom, a rising debt-to-GDP ratio, anaemic growth and an ageing population, the UK has little margin for error. UK bond yields already stand higher than the rest of the G7 and have risen sharply since the Liz Truss mini-budget episode. Any further shock to confidence – whether from a loss of fiscal discipline or a snap election – risks pushing yields higher still and increasing an already heavy debt-servicing burden.

The first week under Mr Burnham has been orderly. The coming months, and particularly the Autumn Budget, will determine whether that calm can be sustained.