British government bonds, stocks and sterling fell on Friday, as domestic political uncertainty clashed with global worries about an inflationary shock, leaving UK assets in the mire.
Sterling fell to a five-week low and is down almost 2% against the dollar this week, set for its biggest weekly drop since November 2024.
British Prime Minister Keir Starmer was in a battle to hold on to power after his health minister Wes Streeting resigned from government, while others positioned themselves to challenge his leadership, following disastrous local election results last week.
Markets are concerned that a new leader may be willing to loosen fiscal policy more, with British government borrowing costs up sharply again and UK bank stocks selling off on Friday.
Greater Manchester Mayor Andy Burnham has been offered a path for a possible leadership challenge after another Labour lawmaker said he would resign his parliamentary seat. If Burnham were to win the seat, he could then challenge for the party leadership.
"Market's fear is that Burnham would be more left leaning, and we could see further increase in deficits," Reuters quoted Jefferies economist Mohit Kumar as saying.
"Our base case is one of a managed exit for Starmer and Burnham likely becoming the next PM," he added.
The domestic political drama has coincided with another rise in energy prices on Friday and growing evidence that the economic damage from the Iran war is hurting.
US inflation data this week has shown consumers and factories are starting to see big increases in price pressures as a result of the war, which has pushed up the price of crude by over 50%.
The pound has tended to suffer against the dollar when tensions between Washington and Tehran flare or oil prices rise, given Britain's dependence on energy imports and the economy's sensitivity to higher fuel costs.
It was last down 0.3% on the day at $1.3364 after earlier touching $1.3335, its lowest level in over five weeks.
British bond yields jumped across the curve. The 10-year yield was last up almost 12 basis points (bps) at around 5.11%. Bond yields move inversely with prices.
Stocks also fell. The blue-chip FTSE 100 was last down 0.6%, while the more domestic-oriented FTSE 250 index of midcap stocks was down 1.1%.
UK banks were also down sharply, with Barclays and Lloyds down over 2% each.
