Key Takeaways:
UK equities tumbled Tuesday as Prime Minister Keir Starmer's resignation compounded a hawkish rate outlook, sending the FTSE 100 to a one-week low and the domestically focused FTSE 250 to its weakest since June 10.
The FTSE 100 fell 0.7% to 10,374 by mid-morning, extending Monday's losses after Starmer said he would step down following mounting pressure from Labour lawmakers. The FTSE 250 dropped 1.8%, with both indexes touching their lowest levels since June 12 and June 10, respectively.
"The selloff in UK equities reflects two compounding headwinds — a leadership vacuum at a time when the government's fiscal room is extremely narrow, and a global rates repricing that is hitting growth-sensitive sectors hardest," said Neil Wilson, market analyst at Saxo. "Who becomes chancellor will be a big signal about the new regime's economic priorities."
Mining stocks led the decline as a stronger dollar weighed on commodity prices, with Fresnillo falling 6.1%, Antofagasta dropping 4.8% and Anglo American losing 3.7%. Tech investment trusts also slumped, with Scottish Mortgage down 4.8% after SpaceX tumbled 16% overnight. Telecom Plus plunged 30.5% after management unveiled a £55 million annual investment plan that will cut current-year profit by 39%, according to Peel Hunt.
The political turmoil comes as the UK economy shows fresh signs of weakness. The S&P Global flash composite PMI fell to 49.4 in June, a 14-month low and below the 50.5 consensus, with services activity contracting to 48.7 — its weakest in 41 months. Manufacturing provided a rare bright spot, with the output index rising to a 21-month high of 53.6.
Gilt yields hold firm as markets eye succession
Despite the political uncertainty, 10-year gilt yields held near 4.80%, with traders pricing in a relatively orderly succession. Andy Burnham, who won the Makerfield by-election last week, is widely expected to succeed Starmer, though the composition of his cabinet remains unclear.
"The biggest risk for UK assets is if an emboldened Burnham makes 'brave' decisions on tax and spending," Saxo's Wilson said. "Gilt markets will be happy if it's Streeting as chancellor, perturbed if it's Miliband."
The selloff in London tracked a broader global equity decline. The Stoxx 600 fell 0.9%, Germany's DAX dropped 1.3%, and Japan's Nikkei slid 3.55%. South Korea's Kospi bombed 10% amid a tech-driven de-risking that sent the Nasdaq down 1.3% overnight. Brent crude fell 1.4% to $76.80 a barrel as the dollar strengthened.
The UK's political transition coincides with the 10th anniversary of the Brexit referendum, a period over which 10-year gilt yields have surged from near 1% to almost 5%. The government now spends roughly 8% to 9% of its revenue on interest payments, constraining the next leader's fiscal options.
This article is for informational purposes only and does not constitute investment advice.
