UK shares traded lower on Tuesday as investors assessed growing domestic political uncertainty surrounding Prime Minister Keir Starmer and renewed tensions in the Middle East.
The blue-chip FTSE 100 fell 0.4% by 1053 GMT, while the midcap FTSE 250 dropped 1.2%.
Investors assess Starmer’s political future
Market sentiment remained cautious after Starmer rejected calls to step down despite growing pressure within the Labour Party.
On Monday, Starmer made an emotional appeal to both voters and Labour lawmakers, urging them to continue backing his leadership and warning that a leadership contest could trigger further instability and chaos.
However, more than 80 Labour lawmakers have publicly urged the prime minister to announce a resignation timeline to allow the party to transition to a new leader in an organised manner.
Despite the mounting pressure, Starmer has insisted he will remain in office.
The latest market moves suggested investors were still uncertain about the political outlook in the UK, even after Starmer’s attempts to calm concerns.
Middle East tensions add to market caution
Investor sentiment was also weighed down by concerns surrounding the ongoing conflict in the Middle East.
US President Donald Trump said the ceasefire with Iran was “on life support,” raising fears that diplomatic efforts to stabilise the region were losing momentum.
At the same time, Tehran rejected a US proposal aimed at ending the conflict and maintained a list of demands that Trump described as “garbage”.
The lack of progress on negotiations added to broader market uncertainty, with investors continuing to monitor geopolitical risks closely.
Bank and defence stocks lead declines
The weakness across UK equities was led by banking stocks.
The UK banking index fell 2.3%, pressured by a sharp decline in shares of Metro Bank, which dropped 5.2%.
Shares of Barclays also declined 3.6%, contributing to the broader weakness in the financial sector.
Meanwhile, aerospace and defence stocks slipped 2%, reflecting broader risk-off sentiment in the market.
The rate-sensitive real estate sector also came under pressure, falling 1.9% as investors moved away from sectors considered vulnerable during periods of heightened uncertainty.
The declines across multiple sectors highlighted investor caution as markets balanced domestic political developments with escalating geopolitical concerns abroad.
Yields move closer to multi-year highs
UK government borrowing costs climbed sharply as traders evaluated the fiscal implications of prolonged political instability.
The benchmark 10-year gilt yield rose 11 basis points to 5.11%.
That move pushed yields closer to levels last seen in 2008.
Similar levels were previously reached in March amid concerns over the inflationary impact of the Iran conflict.
Meanwhile, the 30-year gilt yield, which is highly sensitive to long-term fiscal concerns, rose 10 basis points to 5.78%.
The rise in borrowing costs highlighted growing investor caution as political uncertainty and geopolitical tensions continued to cloud the outlook for UK financial markets.
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