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Starmer's U-turn on Reeves revives market sentiments, UK govt bonds reverse Wednesday's sell-off
UK government bonds rebounded on Thursday after Prime Minister Keir Starmer expressed strong support for Rachel Reeves to continue as chancellor 'for a very long time,' easing market concerns about a potential shift in fiscal policy.
The bond and equity markets recouped some of the losses from Wednesday's downturn, which was sparked by fears that a new chancellor could increase public borrowing. In a late-night BBC interview, Starmer backed Reeves, while the chancellor later made an unplanned television appearance to reaffirm the government's commitment to its fiscal rules.
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Following these developments, yields on 10-year gilts fell by 0.07 percentage points to 4.55 per cent, partly offsetting Wednesday's sharp rise of 0.16 percentage points—the largest single-day increase since April.
The pound also strengthened against major currencies. Meanwhile, a key business survey revealed that the UK's services sector grew at its fastest pace in 10 months.
However, part of the market gains were trimmed after the release of stronger-than-expected U.S. employment data, which led to higher U.S. Treasury yields as investors reconsidered the likelihood of the Federal Reserve cutting interest rates soon.
'The gilt market likes the ironclad commitment to the fiscal rules and chancellor Reeves' strong track record of taking the difficult but necessary corrective actions to make sure they are met,' Tomasz Wieladek, chief European economist at T Rowe Price told FT.
'The market is certainly giving the chancellor a vote of confidence,' added Sanjay Raja, chief UK economist at Deutsche Bank.
Earlier on Thursday, Reeves said that she was determined to get on with her job despite its tough moments, a day after she appeared in tears in parliament, sparking fears about her future in the job and triggering a market selloff.
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Smiling and looking relaxed, Reeves appeared alongside Prime Minister Keir Starmer and spoke briefly at an event to launch the government's plans for the state-run health service, before addressing Wednesday's events in a media clip.
Reeves said on Thursday that she was determined to get on with her job despite its tough moments, a day after she appeared in tears in parliament, sparking fears about her future in the job and triggering a market selloff.
Smiling and looking relaxed, Reeves appeared alongside Prime Minister Keir Starmer and spoke briefly at an event to launch the government's plans for the state-run health service, before addressing Wednesday's events in a media clip.
British borrowing costs rose and the pound fell as the weekly question-and-answer session unfolded on TV, with market analysts saying the moves reflected concern that Reeves could be replaced and the government thrown into further turmoil.
Reeves restated that the government had fixed the foundations of the economy and credited Starmer with their election win one year ago, and told reporters she was 'proud of what I've delivered'.
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Starmer said it was 'fantastic' that Reeves was at the event and that he had 'every faith in my chancellor,' saying she had made important decisions and would be in the job for many years to come.
'We are working in lockstep and we will continue to do so for a very long time,' he said. 'That is a good thing for the government, it is a good thing for the country.'
Starmer - who initially hadn't explicitly backed Reeves when asked about her future during the parliamentary exchange - said he didn't realise Reeves had been crying, as Prime Minister's Questions is 'pretty wild'.
Reeves also played down Starmer's initial reaction, saying: 'I think people can see that Keir and me are a team.'
With inputs from agencies
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