UK markets shrug off challenge to PM Brown for now

By David Milliken

LONDON, Jan 6 (Reuters) - British financial markets largely shrugged off a challenge to Prime Minister Gordon Brown's leadership on Wednesday, judging that it was unlikely to succeed or have a decisive impact on a national election due by June.

While sterling slipped to a day's low against the euro on news that two former ministers had called for a ballot of Labour legislators on Brown's future, the British currency ended the day little changed.

Similarly, the FTSE-100 share index ended the day in line with its pan-European counterpart, while fixed income strategists attributed underperformance by British government bonds to more general worries about the scale of British public borrowing than anything specifically political.

'This hardly seems a rebellion and equity markets are too focused on the here and now to bother about election infighting just yet,' said Mic Mills, a senior trader at spread betters ETX Capital.

After an initial hiatus, a steady stream of senior ministers appeared on British television to endorse Brown, and the Labour members of parliament behind the challenge, Patricia Hewitt and Geoff Hoon, have no formal means to force a secret ballot.

Moreover, replacing a Labour leader is a lengthy process, requiring a special party conference and votes by hundreds of thousands of trade unionists and party members.

Brown survived a much more serious challenge in June last year, when several ministers resigned, and there is no one clear contender to replace Brown, who has frustrated many Labour MPs by allowing the party to trail the opposition Conservatives by around 10 percentage points in opinion polls.



FISCAL FOCUS

Currency traders and gilt investors tend to view British politics through the prism of its swelling budget deficit, which is set to rise to over 12 percent of GDP this year and next.

Ratings agencies have warned that Britain could lose its coveted triple-A sovereign debt rating if the next government does not set out clear plans to reduce this -- an outcome which could cause gilts and sterling to tumble.

So it is a close election race that worries investors most, as this brings the possibility of a 'hung parliament' where no one party has overall control -- leading to months of political horse-trading over how best to reduce the deficit.

'In terms of their policies on the economy, I don't think the two main parties are that far apart, and I don't think a change in leader for the Labour Party would make any real impact on that,' said Jonathan Loynes of consultancy Capital Economics.

'But the knee-jerk reaction to (a challenge) would probably be negative, as there is already uncertainty about the possibility of a hung parliament and the impact that would have on the timing of fiscal consolidation.'

Unevenly sized electoral districts mean that the Conservatives are estimated to need at least a 6 percent lead over Labour to be sure of a workable majority.

However, most market participants expect the challenge to Brown to rapidly fade away unless a senior minister publicly calls for Brown to go.

David Buik, senior partner at BGC Partners said the challenge to Brown's leadership had so far 'hardly created a ripple'.

'When I heard that Gordon Brown's leadership had been challenged, I was ecstatic with joy until I discovered who the challengers were ... Certainly stock markets were unmoved by this interjection,' he said.

(( For a related news story, please double click on ))

(Additional reporting by Jon Hopkins; Editing by Jon Boyle) Keywords: BRITAIN POLITICS/MARKETS (Reuters Messaging: [e-mail]; [e-mail]; [phone]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.