A Pepperstone research note dated Monday lays out three potential political outcomes for Prime Minister Keir Starmer and assesses how each could affect UK financial markets.
The note places a 20% probability on Starmer remaining in post despite the current Labour Party revolt. It assigns two 40% probabilities to the alternative, more adverse scenarios - both of which Pepperstone says pose direct downside risks to sterling and UK government bonds.
Cable was trading at $1.36 as of the note, a level that Brown described as not yet having "adequately discounted" the political risks ahead.
What hinges on this week
Pepperstone frames the immediate outlook around Starmer’s keynote speech on Monday and a Tuesday morning deadline set by Catherine West MP. If that address fails to soothe dissent following Labour’s poor showing in last week’s local elections, West has said she will trigger a stalking horse leadership challenge.
Under the most likely path outlined by the note, a stalking horse mechanism would produce a contest between Health Secretary Wes Streeting and former Deputy Leader Angela Rayner, with Rayner the preferred candidate. An alternative timetable scenario described by Pepperstone would require Starmer to announce a departure date by year-end, allowing Manchester Mayor Andy Burnham time to return to Westminster and contest the leadership against Streeting - with Burnham favoured by the party membership. The King’s Speech on Wednesday is also singled out as a closely watched event in the coming days.
Brown said the least probable outcome is Starmer continuing as leader. Even if he stayed, Brown said this would leave him "with effectively no political capital left, likely finding it difficult/impossible to govern," and would result in "a degree of political paralysis."
Market implications flagged by the note
Pepperstone warns a change of leadership that shifts the party to the left could loosen fiscal rules and increase government spending. The note lists potential tax moves - increases in National Insurance, VAT or income tax - as policy options that would make it "unlikely that the yield premium on a 10-year Gilt over G7 peers will fade any time soon." At the time of the note the 10-year Gilt yield stood at 4.9477% compared with a G7 mark of 2.479%.
On sterling, Pepperstone says options markets appear to be under-pricing volatility. Cable straddles imply an expected move of only +/- 105 pips over the coming week and "just a couple of big figures over the next month," which Brown judged "rather conservative." Risk reversals indicate puts are trading at a premium to calls but are "well off the bearish extremes printed in mid-March," a positioning Brown described as "far too optimistic."
Technical levels highlighted as important for cable include the 1.35 handle - which coincides with the 100-day moving average at 1.3480 - followed by the 200-day moving average at 1.3425 and March lows near 1.32.
Timing and next steps
Pepperstone expects a new Labour leader to be in place before the party’s September conference. The research note also states that the precise timetable for any general election would be set by the party’s National Executive Committee (NEC).
The note presents a concise slate of probabilities and possible market outcomes without extending beyond those scenarios. The next several days - including the keynote speech, the potential challenge trigger by Catherine West, and the King’s Speech - are the immediate catalysts that Pepperstone identifies as likely to determine which of the three paths materialises.
Note: All probabilities, market levels and quotations are taken from the Pepperstone research note dated Monday and from the market readings cited therein.