UK markets were unchanged this week, with the FTSE 100 Index trading at 10,220 points at the time of writing. The UK economy expanded by 0.6% in the first quarter, led by the dominant services sector, as the energy shock triggered by the Middle East conflict failed to derail its momentum. The figure from the Office for National Statistics was in line with forecasts from economists polled by Reuters and compared with an upwardly revised 0.2% in the final three months of last year.
The Office for National Statistics said that some businesses brought forward activity to March in anticipation of energy prices rising further, which could have negative effects on the economy in the second quarter. The economy expanded 0.3% in March, surpassing forecasts.
The robust first-quarter growth, the fastest of any G7 country so far, was broad-based with services, manufacturing and construction all contributing. The services sector grew by 0.8% during the period. The UK’s growth compared with a 0.1% quarterly expansion in the Eurozone and 0.5% in the US. It also outpaced Canada, France, Germany and Italy. Chancellor Rachel Reeves hailed the figures, saying that they were evidence that the Government has “the right economic plan” and warned Labour MPs against unleashing the “chaos” of a leadership contest.
Despite the positive start to the year, the Middle East conflict is set to lower typical household incomes by £550 this year, according to research published on Thursday by the Resolution Foundation. Economists also warned that the first-quarter expansion of 0.6% matched a pattern seen since 2022, in which a growth spurt at the start of the year has fizzled out later, raising questions about the Office for National Statistics’ seasonal adjustment of the data.
Britain’s most senior statistician pointed to the repeated disruption of the UK’s annual Budget process as one reason it had become harder to adjust the GDP data for seasonal fluctuations in activity in recent years.
UK government bonds and sterling fell on Friday as traders priced in a greater likelihood that Andy Burnham would challenge Sir Keir Starmer for the Labour leadership. Markets fear that Burnham would be more left-leaning, with the possibility of a further increase in deficits under his leadership. A potential path to Downing Street opened up for Burnham on Thursday, when Labour MP Josh Simons said he would resign his seat and trigger a by-election in Makerfield, near Manchester. Burnham, who would need to be an MP to challenge Starmer, said he planned to stand in the Makerfield seat to bring “the change we have brought to Greater Manchester to the whole of the UK”.
Commodity markets
In the commodity markets Brent crude futures traded around $109 per barrel on Friday and are set for a weekly rise, as risks in the Strait of Hormuz persisted amid stalled US-Iran peace talks. US President Donald Trump on Thursday warned Iran to reach a deal or face “annihilation”, saying his patience with Tehran was running out.
The US and Iran failed to agree on a US-drafted proposal earlier this week, leaving the key waterway largely closed. Meanwhile, the International Energy Administration reported that crude and fuel flows through the Strait fell by around 4 million barrels per day in March and April, warning that the global oil market could remain materially undersupplied through October even if the conflict is resolved next month.
President Trump said China has agreed to purchase oil from America, following talks with Chinese leader Xi Jinping in Beijing this week. China has not confirmed the energy purchases. The gains also came after both presidents agreed that the Strait of Hormuz must remain open. Meanwhile, US Treasury Secretary Scott Bessent said that China will work behind the scenes to help reopen the Strait of Hormuz.
Gold prices traded around $4,540 an ounce on Friday and are set for a weekly fall, pressured by accelerating US inflation that fuelled concerns that the Federal Reserve may need to keep interest rates elevated or even hike them.
Equity markets
US equity futures fell on Friday as investors took profits following a strong rally, while persistent Middle East tensions, rising inflation concerns, and growing expectations for a US interest rate hike pressured equities.
In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.75%, the S&P 500 gained 0.77%, whilst the Nasdaq Composite advanced 0.88%. US inflation rose to 3.8% in April, its highest level in three years, as President Donald Trump’s war in Iran triggered a surge in petrol prices that has inflamed America’s cost of living crisis. The Bureau of Labour Statistics’ consumer price index has risen sharply since the conflict began. It had already increased from 2.4% in February to 3.3% in March versus a year earlier. The figure for April was above Wall Street expectations and marks the first time in three years that inflation has outstripped wage growth. The last time prices rose this quickly was in 2023 following the energy shock triggered by Russia’s invasion of Ukraine. The report is the latest indicator of how the Iran conflict is reverberating across the world’s biggest economy, with higher fuel costs increasingly spilling into other sectors. It will put pressure on President Trump, whose popularity is near record lows, as the war exerts a heavy toll on American households.
Core inflation, which strips out volatile food and energy prices, rose to 2.8% from 2.6% the previous month, driven in part by a statistical quirk related to last year’s government shutdown. Elsewhere, Chinese President Xi Jinping told American chief executives travelling with Donald Trump this week that China’s door to business “will only open wider and wider” as the leaders of the world’s two biggest economies met in Beijing. According to a readout of the Xi-Trump meeting released by Xinhua, the Chinese leader also called for the two sides to expand co-operation across the economy and trade, health, agriculture and law enforcement. However, Xi warned Trump that the “Taiwan question” is critical to US-China relations, adding that it could lead to conflict if badly managed. China claims sovereignty over Taiwan and has threatened to take control of it by force if Taipei resists indefinitely.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.