Sir Keir Starmer fights on after resisting demands to quit

Prime Minister Sir Keir Starmer resisted renewed calls to resign after Labour figures including Scottish leader Anas Sarwar urged him to go amid fallout from the Peter Mandelson scandal, receiving visible Cabinet support and reluctance from MPs to mount a concerted effort to remove him. Several senior No 10 aides have departed and the top civil servant is rumoured to leave as Starmer reshuffles his team and prepares to attend the Munich Security Conference; the episode creates political uncertainty but appears contained and likely to have only modest near-term market implications.

Analysis

Market structure: Short-term winners are large-cap, globally diversified UK exporters and defence contractors (relative FX hedge) while domestic-facing mid/small caps, regional banks, retailers and housebuilders are vulnerable as political noise raises growth and policy uncertainty. Expect rotation into FTSE 100-style liquidity (VUKE.L) and defence names (BA.L, RR.L) if headline risk persists; domestic cyclicals and discretionary demand see pricing power compress by 2–5% in worst weeks.

Risk assessment: Tail risks include PM resignation or snap election (low-probability but high-impact) that could trigger a 50–100bp spike in 10y gilts and 5–8% GBP depreciation over 1–3 months; immediate (days) moves are likelier in the 10–25bp gilt / 0.5–1.5% GBP range. Hidden dependencies: fiscal reaction (tax cuts or stimulus) would flip gilts from safe-haven bid to sell-off; Munich Security Conference could re-focus markets on geopolitics, supporting defence. Key catalysts: Mandelson fallout escalation, formal resignation, or a clear policy shift from No 10 within 7–21 days.

Trade implications: Tactical pair trades (long FTSE 100 / short FTSE 250) and options hedges on GBP dominate near-term opportunities; favour convex downside protection (short-dated GBP puts or put spreads) and selective long exposure to defence contractors ahead of geopolitical attention. Avoid duration in gilts if fiscal loosening risk rises; use 1–3 month option-based hedges to control cost.

Contrarian angles: Consensus underprices the asymmetric risk from a fiscal U-turn — markets may rally gilts initially but reprice sharply if stimulus appears; conversely a stable PM outcome would boost domestic cyclicals by 3–6% as headline risk evaporates. Historical parallels (UK political scandals with retained PMs) show 2–8 week mean reversion in GBP and equities, so size positions to short windows and prefer option structures to mitigate timing risk.

Key Decisions for Investors

• Establish a 2–3% NAV pair trade: +VUKE.L (Vanguard FTSE 100 ETF) and -MIDD.L (FTSE 250 ETF or equivalent) sized equally, horizon 1–3 months; target relative outperformance +150–300bps if political noise favors large exporters.
• Buy tactical GBPUSD downside protection: allocate 0.5% NAV to a 1-month put spread (buy 1.5% OTM put, sell 3.5% OTM put) to cap premium cost while protecting against a 1.5–3.5% sterling decline in the next 30 days.
• Initiate 1–2% NAV longs in BA.L (BAE Systems) and RR.L (Rolls‑Royce) in equal weight over 2–6 weeks ahead of Munich Security Conference; objective +10–25% rerating if geopolitics dominate headlines.
• Reduce UK domestic cyclical exposure: trim 1–2% NAV from BARC.L and HSBA.L and shorten UK sovereign duration by ~0.5 years (via futures or ETF) within 30 days to hedge risk of gilt sell-off if fiscal loosening appears.