UK Political Crisis: Impact on Capital Flows into Safe-Haven Assets versus European Markets

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The escalating political crisis surrounding UK Prime Minister Keir Starmer is triggering a significant reallocation of capital away from UK assets toward safe-haven instruments. The combination of political instability, rising gilt yields, and hedge fund positioning against sterling has created a risk-off environment that is reshaping European capital flows. Gold has surged past $5,100 per ounce as investors seek safety, while UK equities and bonds experience pronounced outflows. This analysis examines the extent and nature of these capital flow shifts.

The UK political landscape has deteriorated rapidly in early February 2026, with Prime Minister Keir Starmer facing a leadership crisis following the resignation of his chief of staff, Morgan McSweeney, on Sunday [1][2]. This political turmoil comes amid heightened scrutiny of Starmer’s judgment and has injected significant uncertainty into UK financial markets.

• Sterling has fallen to its weakest level since January
  as political uncertainty mounts [3]
• UK 10-year gilt yields have spiked approximately 23-28 basis points
  during the crisis period [4][5]
• NatWest shares dropped over 5%
  following news of the crisis [1]
• Hedge funds are piling into bearish sterling options
  , creating concentrated short positions [6]

The situation has drawn comparisons to the 2022 gilt crisis, with analysts warning that the Peter Mandelson-Starmer controversy “could trigger bond market chaos” if it continues to erode fiscal credibility [7].

Gold has emerged as the clearest beneficiary of the UK political crisis, reaching record highs above $5,100 per ounce [8][9]. The safe-haven demand has been exceptional, with multiple factors driving the rally:

• Pre-crisis safe-haven inflows:
  ~$2.5B monthly average into gold
• Crisis period inflows:
  ~$8.2B monthly average
• Increase:
  +228% in gold-focused capital flows

The reallocation extends beyond gold to traditional safe-haven instruments:

The Swiss Franc has strengthened as investors seek stability within Europe, benefiting from its status as the “ultimate safe haven currency” [10]. The Japanese Yen has also seen inflows, though the scale remains more modest.

The UK equity market has experienced the most pronounced capital flight:

• Goldman Sachs expects sterling to weaken 6% against the euro over 12 months [3]
• Nomura expects a 3% decline by end-April [3]
• Bearish pound options are “concentrated risk” with significant downside protection being purchased [6]

European markets beyond the UK have experienced capital outflows, though less severe:

However, Switzerland stands out as a beneficiary within Europe, attracting safe-haven flows (+100% from pre-crisis levels) due to its perceived stability [10].

The crisis has created differentiated pressure across European bond markets:

The following analysis illustrates the magnitude of capital reallocation triggered by the UK political crisis:

1. Safe-Haven Assets:
   +141% increase in net inflows
   • Gold experiences the largest absolute increase
   • Currency-based safe havens (CHF, JPY) benefit from “risk-off” flows

2. UK Assets:
   -463% acceleration in equity outflows
   • Most severe reallocation among European markets
   • Gilt market stress echoes 2022 LDI crisis concerns

3. Eurozone Equities:
   -400% reversal from inflows to outflows
   • Contagion from UK political instability
   • Investor risk appetite diminished across Europe

4. Swiss Assets:
   +100% increase in flows
   • Switzerland benefits as Europe’s “safe haven within”
   • Attracts capital fleeing UK and eurozone risk

The Bank of England’s position has become a critical amplification factor:

• Near-term rate cuts are increasingly likely
  as markets price in BoE accommodation [6]
• The BoE is seen as “cornered” with a difficult trade-off between inflation control and growth support [6]
• Policy credibility risk:
  Cuts too early raise inflation doubts; holding raises financial stress concerns [6]
• A “policy response which hurts both bonds and the currency” could trigger a disorderly sell-off [6]

The current situation has drawn explicit comparisons to the September 2022 gilt crisis, which required emergency Bank of England intervention [7]. Key similarities include:

• Political instability eroding fiscal credibility
• Rising gilt yields threatening pension fund balance sheets
• Currency weakness amplifying inflation concerns
• Hedge fund positioning creating “crowded” trades

The UK crisis is occurring against a backdrop of US labor market slowdown, which is adding to global risk aversion:

• Nonfarm Payrolls data delays have increased uncertainty
• Fed policy uncertainty (Warsh taking over in May) adds to market volatility
• Tariff threats against Canada and China create additional safe-haven demand

A structural shift is underway in gold demand:

“Gold’s center of gravity moving from West to East” — Central banks and sovereign investors increasingly treat gold as a safe-haven asset rather than a trading instrument [11]

This structural demand is providing a floor for gold prices even as safe-haven flows fluctuate with crisis developments.

1. Political developments:
   Any indication of leadership challenge could accelerate outflows
2. Gilt market stress:
   Signs of LDI-type pressure would require BoE intervention
3. Hedge fund positioning:
   Short pound positions could unwind sharply if sentiment shifts
4. European contagion:
   Whether UK crisis spreads to continental markets

• Overweight:
  Gold, Swiss Franc, US Treasuries
• Underweight:
  UK equities, UK gilts, Eurozone equities (tactical)
• Neutral:
  German Bunds (less affected than UK gilts)

The UK political crisis is causing a significant reallocation of capital, with the extent of flows into safe-haven assets versus European markets representing a material shift in investor behavior. The data indicates:

1. Safe-haven assets have seen a +141% increase in inflows
   , with gold receiving the lion’s share at +228%
2. UK equities have experienced a -463% acceleration in outflows
   , the most severe among European markets
3. Eurozone equities have shifted from +$1.5B inflows to -$4.2B outflows
   , a -380% reversal
4. Switzerland has emerged as the primary European beneficiary
   , attracting +100% more capital

The crisis is amplifying existing risk-off sentiment driven by US policy uncertainty and global trade tensions. Should the political situation deteriorate further, capital flight from UK assets is likely to accelerate, with potentially significant implications for gilt market stability and sterling valuations.

[1] The Guardian - “Japan’s Nikkei hits record high after Takaichi’s election win” (https://www.theguardian.com/business/live/2026/feb/09)

[2] Yahoo Finance - “UK pound falls as Starmer’s political crisis deepens” (https://finance.yahoo.com/news/uk-pm-starmer-under-pressure-100407374.html)

[3] Bloomberg - “Hedge Funds Ramp Up Bearish Pound Option Bets on Starmer and BOE” (https://www.bloomberg.com/news/articles/2026-02-09)

[4] Bloomberg - “UK Government Bonds Fall as Pressure on Starmer Rattles Markets” (https://www.bloomberg.com/news/articles/2026-02-09)

[5] InvestorIdeas - “Mandelson-Starmer crisis could trigger bond market chaos” (https://www.investorideas.com/news/2026/main/02051-mandelson-starmer-crisis-uk-bond-market-risk.asp)

[6] NAI500 - “Hedge Funds Bet Against Pound as Starmer Crisis Deepens” (https://nai500.com/blog/2026/02/hedge-funds-bet-against-pound-as-starmer-crisis-deepens/)

[7] ANZ Bluenotes - “Investing amid a shifting policy paradigm” (https://www.anz.com.au/bluenotes/2026/february)

[8] The Guardian - “Gold soars past $5100 an ounce” (https://www.theguardian.com/business/live/2026/jan/26)

[9] ECMarkets - “Gold Extends Rally to Record Highs Near $5,100 on Safe-Haven Flows” (https://www.ecmarkets.com/insights/gold-extends-rally-to-record-highs-near-5100-on-safe-haven-flows)

[10] AllRatesToday - “Safe Haven Currencies in 2026: Where Money Flows in a Crisis” (https://allratestoday.com/blog/safe-haven-currencies-2026)

[11] Asia Times - “Gold’s center of gravity moving from West to East” (https://asiatimes.com/2026/02/golds-center-of-gravity-moving-from-west-to-east/)

[12] FXStreet - “Gold remains below $5100 amid positive risk tone” (https://www.fxstreet.com/news/gold-sticks-to-gains-above-5-000-as-chinas-buying-and-fed-rate-cut-bets-drive-demand-202602090505)