The pound fell to a one-month low last night after Andy Burnham confirmed he would stand for Parliament in his bid to oust Sir Keir Starmer.
The Mayor of Greater Manchester issued a statement shortly after 5.30pm yesterday vowing to stand in the looming Makerfield by-election.
That came around 15 minutes after Josh Simons said he would clear the way for Mr Burnham to have a shot at power.
Within minutes, the pound had sunk to $1.34, its lowest level since April 13.
The near-one per cent drop was its largest in more than three months.
News of the arrival of the so-called "King in the North" had already prompted panic in the City, with the yield on 30-year Government bonds briefly soaring to its highest level since 1998 on Tuesday as the PM stared down the barrel of a leadership race.
"The markets hate uncertainty, but they hate a political vacuum even more," Nigel Green, the chief executive of deVere Group, said.
"A Cabinet resignation followed by a leadership fight would signal that the Government is losing control of itself while investors are already questioning the country's fiscal direction," he added.
The pound fell to a one-month low last night after Andy Burnham confirmed he would stand for Parliament
|GETTY
Mr Burnham's allies, however, declared the markets would simply "have to fall into line" should he become Prime Minister.
Investors would flood to Burnham-run Britain for "progressive policies that do speak to our communities", Labour MP Paula Barker said.
The Mayor himself is thought to be preparing his pitch to the bond markets to shore up his credibility before a potential shot at No10.
The Greater Manchester Mayor, according to The Telegraph, will soon endorse an economics pamphlet to help raise his credentials on the national stage.
THE MARKETS REACT - READ MORE:
Labour MP Paula Barker declared the markets would simply 'have to fall into line' should Andy Burnham become Prime Minister
|HOUSE OF COMMONS
"The Productive State: A Framework for Manchesterism" will be published by Mainstream, a Labour-linked group affiliated with Mr Burnham which has called for more left-wing policies, in the coming weeks.
But investors appeared less convinced.
"I think the market worries quite a lot about Burnham," one leading gilt investor told the Financial Times, pointing to his comments last year that the country should not be "in hock" to the bond market.
The newspaper went on to ask 10 fund managers which of Labour's leadership frontrunners - Mr Burnham, Angela Rayner, Ed Miliband and Wes Streeting - would trigger the most negative bond market reaction.
Nine of 10 fund managers told the FT Mr Streeting would be the most market-friendly Labour leader of the current front-runners
| GETTYSix said the Greater Manchester Mayor - while nine said Mr Streeting would be the most market-friendly.
Those in Government have already started hailing their credentials on the economy as this morning's news of Angela Rayner's HMRC clearance broke.
An hour after Ms Rayner opened the door to a potential run at No10, ONS figures showed the UK's real gross domestic product (GDP) grew by 0.6 per cent in the three months to March 2026 compared with the three months to December 2025.
Minutes later, in a sly swipe at a looming Labour civil war, Rachel Reeves said: "Now is not the time to put our economic stability at risk."
And the GDP boost was enough to offset any chaos in Downing Street.
The FTSE 100 closed higher on Thursday amid the ONS figures, a cooling oil price and easing gilt yields.
It closed up 47.58 points, 0.5 per cent, at 10,372.93.
The FTSE 250 ended up 299.70 points, 1.3 per cent, at 22,828.07.