Instant View: Britain's Keir Starmer to resign, pound holds lower

LONDON, June 22 (Reuters) - Prime Minister Keir Starmer said on Monday he would resign, with a new leader to be in place by the time parliament returns in September.

Less than two years after he won a landslide election victory that promised to end chaos in British politics, Starmer said he would support whoever replaced him.

Sterling remained lower on the day and was last trading at around $1.322. It stood at 86.65 pence per euro, little changed on the day.

Britain's 10-year gilt yield was flat on the day at 4.85%, while London's blue-chip FTSE stock index was steady . 

COMMENTS:

RUTH GREGORY, DEPUTY CHIEF UK ECONOMIST, CAPITAL ECONOMICS, UK

"So far, markets have mostly shrugged off the news."

"This is consistent with the view that Starmer’s resignation was widely expected. That said, this may not last if there is a tack towards a more expansive fiscal policy during a leadership campaign or once in office. In this regard, the new PM’s choice of Chancellor matters."

RUSS MOULD, INVESTMENT DIRECTOR, AJ BELL, UK:

"Bond markets already rate the UK as higher risk, as illustrated by the rise in gilt yields this year. There is potential for gilt yields to go even higher if markets worry about who might become the next chancellor and if there will be radically different policies under a new prime minister."

MICHAEL PFISTER AND HAUKE SIEMßEN, STRATEGISTS, COMMERBANK, GERMANY

"We think the main topics will now be whether Burnham will face competition in his leadership challenge (although he is probably the favourite) and, if he is elected, whether he will adhere to the fiscal rules (as he has suggested over the last couple of weeks) or be more open to increased spending (in line with his previous views)."

"We believe that the market is not fully pricing in the prospect of an even more loose fiscal policy; the recent gilt movements are better explained by global factors. Therefore, we still see potential for a steeper yield curve and a weaker pound over the next couple of weeks."

ANDERS SVENDSEN, CHIEF ANALYST, ECB & EURO RATES, NORDEA MARKETS, DENMARK

"We've seen the UK (bond yield) curve move other curves when there's been a big sell-off in the long-end and there are definitely risks there. I think it can easily be a catalyst if something happens. I'm definitely watching for spillovers."

LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON

"It’s not a surprise, I expect any initial reaction will be limited. The market will be watching for any potential changes in policy under the new leader. At the moment, Andy Burnham is the favourite and he’s tried to reassure the gilt market that he will stick to the fiscal rules, and there are reports that he’s working with respected economists. That has definitely provided some reassurance to investors and will limit the downside risks for the pound and gilts in the near term."

"The key moment will be that autumn period when the new leader takes over and we can see what changes in policy we see, but I think the risks are tilted to the downside."

RICHARD CARTER, HEAD OF FIXED INTEREST RESEARCH, QUILTER CHEVIOT, LONDON

"What will be interesting to watch from here is the extent that the party has a leadership contest, or whether it is considered a one-horse race and thus everyone steps aside." 

"Markets are wary of Burnham’s previous policy positions so they would prefer to see ideas for governing fleshed out via a leadership contest, keeping surprises to a minimum. There are difficult decisions around welfare and defence spending lurking, with each likely to have an impact on gilts and wider UK markets."

"For now, given the economic team Burnham has been putting in place, alongside the fact he does not appear to be seeking a new mandate, we are probably going to see more of a continuation of the current direction from the government."

KIT JUCKES, CHIEF FX STRATEGIST, SOCIETE GENERALE, LONDON

"He (Starmer) is doing what everyone wanted him to do, that is to announce there will be another leader." 

"Sterling is a touch weaker, so we're not really moving. The market is watching gilts more than the pound, and that looks quiet. The medium-term reaction is that the market is going to get nervous at some point about fiscal policy."

"It's more likely than anything else that sterling remains under pressure as we have higher inflation, higher rates and then we wait for the next round of news."

"The story is that the UK has not had enough growth and the dollar keeps rising."    

CHRIS BEAUCHAMP, CHIEF MARKET STRATEGIST, IG, LONDON

"We're kind of in limbo now, until the nominations close, because it's entirely possible that nobody else has the numbers." 

"We shouldn't assume. It certainly looks like it would be Andy (Burnham), but these things often generate surprise outcomes, which is a trite thing to say, but it certainly offers the possibility for some volatility if somebody else emerges."

"Maybe markets will be more inclined to give someone the benefit of the doubt if they can have a firm hand on the tiller."  

NICK REES, HEAD OF MACRO RESEARCH, MONEX EUROPE, LONDON

"Our view is that the statement today, given there’s no new information, means there’s very little for markets to price in so it’s unsurprising we haven’t seen much movement."

"If we do get a quick resolution (to who is the next leader), there’s still the question of who the chancellor is going to be and how are they going to deal with the fiscal situation."

"Right now we’re rearranging the deckchairs on the Titanic. At the end of the day the UK political situation is dictated by its fiscal situation."

"The one caveat I would give to all this is I think markets could quite like Wes Streeting as chancellor. That’s an upside tail risk to the pound… I think markets could be pleasantly surprised.”

"He has put forward some ideas that would be good for UK growth and fundamentally that’s the one thing that needs to be fixed."

(Reporting by the Reuters Markets Team, Compiled by Dhara Ranasinghe; edited by Alun John)