Reeves was present at Prime Minister’s Questions on Wednesday after the government reversed their plans to cut billions of pounds through welfare reforms.
Her display of emotions sparked speculation about her position in the government, causing market reactions.
The pound fell by 1% against the dollar, ending its recent strong performance against the weaker US currency.
Borrowing costs also saw a significant increase, one of the largest single-day jumps since the turmoil in October 2022 when former Prime Minister Liz Truss’s mini-budget led to her downfall.
The rise in costs slightly eased after Number 10 attempted to dispel rumors of Reeves being replaced.
“The chancellor is staying in her position and has the full support of the prime minister,” stated a government spokesperson, although Prime Minister Keir Starmer did not publicly show his support for her.
A spokesperson for the Treasury explained that Reeves’ emotional state was due to a personal matter.
However, the rise in yields continued, indicating ongoing concerns about the government’s budget calculations.
The reversal of welfare reforms has created a nearly £5bn deficit in Reeves’ financial plans.
The initial rise was caused by the possibility of the chancellor stepping down, suggesting she still holds credibility in the market.
However, the fact that borrowing costs remain high indicates broader concerns about the government’s budget are beginning to surface.
Analysts at Rabobank noted that “investors will be questioning how Reeves will balance the books.” They also anticipate potential tax increases in the upcoming Autumn Budget.
Cabinet minister Pat McFadden confirmed on Wednesday that the government will uphold its promise not to raise income tax, VAT, or employees’ National Insurance Contributions. However, he acknowledged that there will be financial consequences to the decision to backtrack on planned cuts to disability and health-related benefits.
Simon Blundel, head of European fundamental fixed income investments at BlackRock, stated that the increase in borrowing costs suggests “uncertainty surrounding the current government.” However, he also noted that the market is not as vulnerable as it was in 2022 following the mini-budget.
Some investors believe that replacing Reeves at this time could unsettle financial markets.
Craig Inches, head of rates and cash at Royal London Asset Management, believes that the bond market is concerned that a new chancellor will disregard Reeves’ fiscal rules and pursue excessive borrowing without proper funding, along with concerns about UK growth.
The FTSE 250, which is more affected by UK policies than the FTSE 100, closed down 1.34%.