Above: Burnham on Question Time Thursday. Source: BBC.
Andy Burnham confirms he will seek to topple Keir Starmer.
The British pound is underpricing the risks associated with the Makerfield by-election, say analysts, warning that the coming week should see the temperatures rise.
"Political fever heats up next week thanks to the Makerfield by-election. Although voting itself does not take place until Thursday 18th, campaigning and coverage of the poll will intensify," says Philip Shaw, economist at Investec, on the same day Andy Burnham confirms he will challenge Keir Starmer for Prime Minister.
Burnham told a Question Time audience in Wigan on Thursday night: "I would seek to represent you at the highest possible level and give this constituency maximum power and influence. I think Wes Streeting seems to have launched a leadership contest, so if that is running, I would seek to join it."
Burnham is considered to be a left-leaning candidate with a weak commitment to the country's fiscal rules, the guardrails designed to ensure government borrowing doesn't run out of control.
"Burnham’s clear preference for an expansionary fiscal stance, higher taxation and larger gilt issuance present a downside risk to markets," says Matthew Ryan, Head of Market Strategy at Ebury.
Burnham is seen as a shoo-in. Image: Polymarket odds for Makerfield winner.
"We view the upcoming by-election as a fairly significant underpriced risk for sterling, a complacency that perhaps largely reflects the delayed timetable for a possible leadership change, rather than a genuine receding risk in a change in the status quo," he adds.
Despite the upcoming vote and perennial concerns around UK politics and debt, the pound has performed relatively well since March.
The headline pound-to-euro exchange rate has risen to the 1.16 resistance line on two occasions and looks set to test the level again in the coming days, owing to constructive technical conditions and elevated UK bond yields.
However, nearby technical resistance, combined with rising anxieties about the Makerfield vote, could hamper the pound's advance and even deal it a setback.
Burnham has in the past said the government should not be 'in hoc' to the bond markets and that it should spend more to fund social housing construction and defence.
He did row back on that in May, when a spokesperson said he would obey the fiscal rules.
That intervention only came after the pound and bond markets began to display tell-tale signs of nervousness about Burnham's likely success in Makerfield (bond yields up, pound down).
"The problem is that the UK can ill afford such an experiment given the wafer-thin fiscal headroom, upward trajectory in the debt-to-GDP ratio and anaemic growth at a time of rising inflationary pressures and an ageing population," says Ryan.
Above: GB 10-year gilt yield. Debt is increasingly costly to service for the government. That's a headwind for the next PM and a worry for sterling markets.
The trading desk at JP Morgan in London told clients Thursday that Burnham is unlikely to reveal any policy shifts until after the vote.
"Questions are starting to circle more quickly on how he plans to enact the change within the Labour party but it seems very unlikely we get anything before the Makerfield result — his true colours will come out, it is just a question of when," says the JP Morgan note.
JP Morgan traders say they are adding to a EUR/GBP buy trade (betting on GBP weakness) as the by-election approaches.
Burnham's odds of winning in Makerfield stand at 80%.
“Burnham’s dismissive attitude towards the bond markets, while since softened, is one that the bond vigilantes will not forget, and will punish accordingly,” says Ryan.