Stammer's "stay in office" promise dispels speculation of palace intrigue, and the pound and UK bonds both rebound from the shadow of election defeat.

On Friday, the preliminary results of the local council elections in the UK were released, with the ruling Labour Party suffering a major setback. However, Prime Minister Keir Starmer firmly stated that he would not resign, which eased market concerns about political uncertainty and fiscal shift, leading to the British pound exchange rate and UK bond prices rising together. Data shows that the pound rose by 0.5% against the US dollar, reaching 1.362, and also slightly increased against the euro. The bond market reaction was more significant, with UK bond yields falling across the board. The benchmark 10-year bond yield dropped by around 5 basis points; the 30-year bond yield, which is more sensitive to political sentiment, fell by 8 basis points, after reaching its highest level since 1998 earlier this week. As bond prices and yields move inversely, the drop in yields means an increase in bond prices. Prior market risk aversion stemmed from speculation that Starmer might be ousted from within his party. As the vote counts continued to be announced, the Labour Party was expected to lose hundreds of local council seats and control of several local councils, with the main opposition party, the Conservative Party, also suffering significant losses. The right-wing populist party led by Brexit leader Nigel Farage, the Reform UK party, emerged as the biggest winner, gaining over 350 seats in the English regions, while the left-wing Green Party also made significant progress. Although the results of the local elections will not change the composition of the UK Parliament or the party in power, they clearly reflect the ongoing dissatisfaction of voters with Starmer's leadership. Facing what he described as a "extremely difficult" election outcome, Starmer told the media on Friday that the voters had sent a message about the need for change and improvement in their lives, but he would not walk away. "Labour was elected to address these challenges, and I will not let the country descend into chaos. I was elected to serve a five-year term, and I intend to see that term through to the end." Why did the market ease due to his decision to stay? The positive response from the bond and currency markets is highly related to the prospects of potential replacements for Starmer. Analysts and investors have stated that it is still too early to assess the comprehensive impact of the election results, but Starmer's clear decision to stay in his position has somewhat stabilized market sentiment. The complete results of the local elections will be announced on Saturday afternoon local time, when all participating local councils will have their results published; the Scottish Parliament and the Welsh Parliament, as local devolved government bodies, are expected to announce all election results on Friday evening. In a report, the analyst team at Deutsche Bank pointed out that the market is closely watching the statements from Labour Party MPs and cabinet ministers, as the market expects that if Starmer steps down, his successor may relax fiscal rules and increase government bond issuance. Potential challengers, current Deputy Prime Minister Angela Rayner and Mayor of Greater Manchester Andy Burnham, are widely seen as more left-leaning than Starmer. Nick Rees, Macro Strategist at Monex Europe, stated, "We believe any successor to Starmer would not necessarily be a positive for the pound. Rayner is clearly from the left, which could alarm the bond market, and Burnham could likely do the same." Dan Coatsworth, Market Analyst at AJ Bell, analyzed that a new leader taking over could lead to the government increasing borrowing and spending, pushing the already high government bond yields even higher. Currently, the UK government's borrowing costs are the highest among the G7 countries, and the 10-year, 20-year, and 30-year bond yields are all near the key psychological threshold of 5%. Freya Beamish, Chief Economist at TS Lombard, highlighted that the direction of UK politics has a profound impact on government bond yields. In a context of high inflation and economic pressure, it is difficult for the Labour Party to implement an expansionary growth budget policy. She said, "Without addressing wasteful expenditure, solely relying on massive spending to stimulate the economy or blindly cutting taxes to boost growth, the UK bond market will certainly give a negative reaction. While increasing revenue and tax cuts are growth options, the issue of redundant resources on the fiscal expenditure side cannot be ignored." Is the relief rebounding or a precursor to a storm? Although the market took a breath on Friday, caution remains present. Lloyd Harris, Fixed Income Manager at Premier Miton Investors, described the current market movement as a "short-term relief bounce" and hinted that further turmoil may lie ahead. He mentioned that the Green Party did not perform as well as expected in these elections, reducing the risk of them winning the general election, which is a "small positive" for the bond market. Lale Akoner, Global Market Analyst at eToro, also warned that if there is significant internal pressure for Starmer to step down, UK government bonds may once again face selling pressure. She stated, "The core concern for the market is whether this will threaten fiscal credibility. So far no, Starmer's authority has been weakened but there is no clear risk of him being pushed out." Furthermore, renewed tensions in the Middle East have also disrupted market sentiment. The Iran ceasefire agreement being on the brink of collapse led to a rise in oil prices, with the UK's FTSE 100 index briefly falling by nearly 1%, which has complex implications for the bond market. Jonathon Marchant, Fund Manager at Mattioli Woods, pointed out that the market had partially digested the expected Labour Party defeat ahead of the local elections, but if Starmer accelerates towards left-wing policies to appease internal opposition, such policy changes will not be welcomed by the market. Analysts also emphasized the deep ties between UK Chancellor Rishi Sunak and Starmer in economic policy. Nigel Green, CEO of deVere Group, stated that the UK government's credibility in the bond market is extremely sensitive, especially in the already challenging fiscal conditions. He said, "If the pressure on the bond market continues to increase following the election defeat, investors may judge this government as politically weakening and financially constrained, leading to significant revaluation risks."