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[MARKET ANALYSIS] UK assets in focus as scrutiny around PM Starmer heightens, however, the support of most of his Cabinet favours in favour of the narrative that he will remain until at least the May local elections

The heightened scrutiny around PM Starmer, coupled with strong Cabinet support, suggests he may weather immediate challenges ahead of the upcoming elections.

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[MARKET ANALYSIS] UK assets in focus as scrutiny around PM Starmer heightens, however, the support of most of his Cabinet favours in favour of the narrative that he will remain until at least the May local elections

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  • The immediate focus point is the briefing Starmer is due to give to the Labour Party at 18:00GMT today. However, the support of much of his Cabinet and several key members has taken some of the immediate tension out of the situation.
  • Now, we look to the 26th of February by-election in Gorton and Denton. Thereafter, the 7th of May local elections. These two events likely serve as the next major potential flashpoints for the PM, barring some fresh information emerging re. Mandelson/Epstein and Starmer. In-fitting with this, Polymarket has around a 25% chance of a Labour leadership election being "scheduled" by March 31st (i.e. in the aftermath of the Gorton and Denton by-election) and at 58% by June 30th (i.e. in the aftermath of the May local elections).
  • On the Gorton and Denton by-election, polling as of the end of January had Reform with 36% of the vote and Labour just behind on 33%. However, the by-election is a close one to call due to various specific factors, and as such the Greens, Reform or Labour could conceivably win. Pertinently, PM Starmer has described the by-election as a straight contest between Reform and Labour, meaning the results of it will be a significant litmus test for the PM himself and a preview of the May local elections. For Gorton and Denton, Polymarket has a Green victory at 57%, Reform at 34% and Labour at around 6%.
  • The 7th of May local elections are the main test for Labour and, assuming he remains in position, PM Starmer. As of the 24th January, Electoral Calculus' general election prediction (a poll-of-polls on the outcome of an election being held tomorrow) had a Reform minority as the most likely outcome with a 42% probability, followed by a Reform majority at 31%, and no control at 13%. With just an 8% chance of Labour remaining as the largest party. Echoing this, Kalshi has a 59% probability that Reform wins the next UK general election (currently set for before end-August 2029) and just a 22% chance that Labour secures a second term.
Context

The outcomes of the Gorton and Denton by-election and the May local elections will act as critical indicators of not just his leadership stability but also broader market sentiment towards UK assets, particularly for Labour and potential shifts in power.

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