UPDATE 4-Sterling, gilts rise as Starmer vows to stay despite election drubbing

TRADERS AWAIT LEADERSHIP CHALLENGES UK markets have been jittery in the run-up to the ⁠local elections as some investors think the likely replacements for Starmer would move Labour leftwards and increase spending, adding to the pressure on government bonds. "We don't think any of the alternatives to Starmer are likely to be ⁠sterling ​positive," said Nick Rees, head of macro research at Monex Europe.

The pound and UK government bonds climbed on ‌Friday ​after British Prime Minister Keir Starmer said he would not resign despite bruising losses for his ruling Labour Party in local elections. Starmer's Labour haemorrhaged support in areas reporting overnight, with results still rolling in on Friday. The populist Reform UK party of ‌Brexit campaigner Nigel Farage was so far the main winner, gaining more than 350 council seats in England. Investors have been concerned that should Starmer be forced out, he would be replaced by a left-leaning Labour leader, who could increase public borrowing, pressuring debt and currency markets. The pound was last up 0.4% at $1.361, and rose 0.1% against the euro.

Meanwhile, Britain's benchmark ‌10-year gilt yield , a proxy for government borrowing costs, was outperforming other global bonds and had fallen 3 basis points. Yields move inversely to prices. It was too ‌early to gauge the full impact of the results, analysts and investors said, but Starmer vowing to stay on had reassured markets somewhat.

"Obviously a lot can change in the next few hours with the rest of the results," said Matthew Amis, investment director at Aberdeen. "But for the time being this isn't the event that the market was set up for, which was potentially having Starmer falling on his sword," he ⁠said. "So it's a ​bit of a sigh of relief from ⁠the gilt market."

"I think it's an initial relief rally," said Lloyd Harris, head of fixed income at Premier Miton Investors. "But ultimately I think the fireworks are still to come." "I would say it's a small ⁠net positive for gilts that actually the Greens haven't done better," Harris said, referring to the environmentally focused left-wing party which favours higher spending.

Britain's FTSE 100 stock index slipped 0.2% after oil prices rose ​on concerns about the fragile Iran ceasefire, but outperformed broader European equity markets. TRADERS AWAIT LEADERSHIP CHALLENGES UK markets have been jittery in the run-up to the ⁠local elections as some investors think the likely replacements for Starmer would move Labour leftwards and increase spending, adding to the pressure on government bonds.

"We don't think any of the alternatives to Starmer are likely to be ⁠sterling ​positive," said Nick Rees, head of macro research at Monex Europe. "Angela Rayner, clearly from the left of the party, would scare bond markets, as likely would Andy Burnham," he said, naming two Labour politicians often cited as potential challengers to Starmer.

UK 10-year bond yields have traded at 18-year highs in recent weeks, while 30-year yields rose to ⁠their highest since 1998 earlier this week. Lale Akoner, global market analyst at eToro, said gilts could sell off again if credible leadership challenges materialise.

"The market issue is whether ⁠this threatens fiscal credibility," she said. "So far, it ⁠does not. Leadership is weakened, but not clearly at risk of being forced out." The U.S. dollar edged down on Friday against a range of currencies as markets kept an eye on the Middle East. U.S. President Donald Trump told reporters the ceasefire with ‌Iran was still in effect.