BNY’s Geoff Yu highlights that U.K. political uncertainty and potential populist outcomes may trigger short-term volatility in Gilts and GBP, but questions the longer-term impact on U.K. government paper. He maintains a defensive stance on GBP due to weak household demand and dovish Bank of England signals, while noting that improved productivity could eventually transform the U.K. equity outlook and cross-border flows.

Political risk and weak demand weigh

"Any significant underperformance by Labour would likely lead to renewed questions about Sir Keir Starmer’s leadership and trigger an immediate reaction in gilt markets."

"GBP will also face stress, but it is unlikely to be prolonged."

"We have long maintained a defensive view on GBP due to structural factors."

"Bank of England (BoE) Governor Andrew Bailey, who retains the swing vote on the Monetary Policy Committee (MPC), recently said he will enter upcoming meetings “asking if a cut is justified,” that clearly signals the direction of travel."

"In time, if this does translate into higher trend growth and real incomes, the U.K. equity outlook will change completely and encourage more cross-border flow."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)