The Gorton and Denton by-election saw Labour lose heavily to the Green Party and Reform UK. The result adds to political risk in the UK, with Labour facing pressure from both the left and the right.
Labour still holds a large majority in Westminster, so the overall balance in Parliament changes little. The by-election adds pressure to Keir Starmer’s leadership ahead of the regional elections in early May.
May Regional Elections Loom Large
The May regional elections are the next test for Labour and for Starmer. Another heavy defeat could increase the chance of a leadership challenge, including from the left of the party such as Angela Rayner.
Market focus is on the risk of uncertainty if leadership tensions rise. A Blair-aligned figure such as Wes Streeting is viewed as more acceptable to markets than a left-wing challenger.
The report also notes internal party choices linked to the by-election. Andy Burnham had wanted to stand as Labour’s candidate but was blocked from doing so.
The recent by-election result is a significant political signal, even if it doesn’t change the immediate balance of power in Westminster. It confirms a pattern we’re seeing where Labour is being squeezed from both the left and the right. This is increasing political risk, and we’ve seen a corresponding uptick in three-month implied volatility for the pound, which has climbed to over 9% this week.
Markets Watch Leadership Stability
This dynamic puts Keir Starmer’s leadership under immense pressure heading into the critical regional elections in early May. Another significant defeat for Labour there could trigger a formal leadership challenge, creating the kind of uncertainty that asset prices react negatively to. The FTSE 250, which is more sensitive to the domestic UK economy, has already underperformed the FTSE 100 by 1.5% this month on these growing concerns.
For us, the main risk is not just a leadership challenge, but one that comes from the party’s left flank, such as from a figure like Angela Rayner. We only have to look back at the market reaction to Jeremy Corbyn’s rising poll numbers in 2017 to see how the pound and UK government bonds react to the prospect of higher state spending and intervention. A more centrist candidate like Wes Streeting would be viewed far more favourably and would likely trigger a relief rally in sterling.
Given this, we should be looking at strategies that protect against sterling downside and rising volatility leading into May. Buying GBP/USD put options with a June expiry offers a clear hedge against a post-election slide. Recent polls showing Reform UK hitting a record 15% support a thesis that Labour’s large majority may not translate into political stability, making options pricing on UK assets look relatively cheap right now.
