UK markets rose this week, with the FTSE 100 Index rising by 0.7% to trade at 10,572 points at the time of writing.
The UK economy expanded by 0.1% in May, demonstrating resilience despite a sharp rise in energy prices, while highlighting the economic challenges facing Andy Burnham as he prepares to become prime minister. The monthly increase matched economists’ expectations in a Reuters poll and followed a 0.1% contraction in April, according to the Office for National Statistics. Over the three months to May, the economy grew by 0.7% compared with the previous three-month period.
Although this represented continued growth, it marked a slight slowdown from the revised 0.8% increase recorded in the three months to April. The services sector, which accounts for the largest share of UK economic activity, drove May’s expansion with output rising by 0.3%. However, this was partly offset by weaker performance elsewhere, with construction output falling by 0.8% and production by 0.5%.
At the same time, the UK has experienced renewed pressure in the bond markets. Government borrowing costs climbed above 5% for the first time since May this week after escalating tensions between the United States and Iran triggered a global sell-off in government bonds. The conflict, which has disrupted energy markets and raised concerns over inflation, has left the UK particularly exposed because of its dependence on energy imports and already elevated inflationary pressures. Burnham is expected to inherit an economy facing significant fiscal challenges.
Rising gilt yields have increased the cost of servicing government debt, which already exceeds £100 billion annually. Investors have also expressed concern that a shift towards more expansionary fiscal policies could lead to increased borrowing, adding further strain to the public finances.
The Organisation for Economic Co-operation and Development has warned that the government may need to consider short-term measures to strengthen public finances if conditions deteriorate. These could include increasing VAT, introducing a temporary windfall tax on energy companies, or suspending the indexation of the state pension.
Over the longer term, however, the Organisation for Economic Co-operation and Development argues that more comprehensive reforms to taxation and public spending will be required to prevent public debt from reaching unsustainable levels by 2050. Additional figures from HM Revenue and Customs showed that the number of people paying income tax in the UK is projected to rise by more than 4 million, reaching 40.8 million between 2023–24 and 2026–27, due to the combined effect of frozen tax thresholds, higher earnings, and population growth.
Commodity markets
In the commodity markets, Brent crude futures traded around $85 per barrel on Friday and are set for a weekly rise after investors weighed escalating tensions between the United States and Iran and the risks to oil supplies moving through the Strait of Hormuz.
The US struck Iran’s coastal defences and missile sites on Wednesday after reimposing a naval blockade of its ports, while Tehran threatened to shut off more regional energy exports, saying it was involved in “existential war” with America. The escalation comes after a fragile truce reached in June collapsed, reviving fears of a return to full-scale conflict and disrupting energy flows through the Strait of Hormuz, which handled about a fifth of daily global oil and LNG trade before the war began.
Fewer vessels passed through the strait on Wednesday, the first day after the US reimposed its naval blockade on Iran. Seven crossed on Wednesday, down from 13 the previous day. Iran said on Thursday that the strait was an inviolable “red line”, warning that if US President Donald Trump carried out his threat to attack Iran’s infrastructure, it would strike all infrastructure across the Gulf region.
Analysts say Iran has signalled it may use its Houthi allies in Yemen to shut the Bab el-Mandeb gateway to the Red Sea, opening a new front against Washington and putting a second of the world’s most vital energy arteries at risk. Oxford Economics said the likeliest scenario was that low, fluctuating levels of traffic through the strait spark intermittent oil price rallies that keep average prices above $80 for several quarters.
Gold prices traded around $3,990 an ounce on Friday and are set for a weekly fall as ongoing tensions in the Middle East heightened inflation worries, adding uncertainty to the trajectory of US interest rates.
Equity markets
US equity markets declined on Friday after also falling on Thursday. In Thursday’s regular trading session, the Dow Jones Industrial Average fell 0.20%, the S&P 500 lost 0.51%, whilst the Nasdaq Composite declined 1.47%.
US inflation fell sharply to 3.5% in June as lower petrol prices helped tame a surge in costs for Americans after three months of sharp increases, prompting investors to rein in bets on higher interest rates. The figure released on Tuesday from the Bureau of Labour Statistics was down from an annual rate of 4.2% in May and marked a sharper drop than the 3.8% predicted by economists polled by Bloomberg.
On a month-on-month basis, inflation fell 0.4% compared with May’s figure, the biggest decline since the outbreak of the Covid-19 pandemic in April 2020, driven by a 9.7% drop in the index tracking petrol. Core inflation, which strips out volatile food and energy prices, was 2.6% on an annual basis, down from 2.9% the previous month.
Analysts said the weaker than expected inflation data will ease pressure on the US Federal Reserve to immediately raise interest rates. Traders in the futures markets now expect the US central bank’s next quarterly point rise by December, having anticipated such a move by October before the data release.
Tuesday’s report relates to a period of respite in the Middle East war, which sent energy prices soaring when it broke out in February and the Strait of Hormuz was largely closed to maritime traffic. The US and Iran agreed a ceasefire in mid-June, but hostilities have flared again in the past week.
Still, analysts said the drop in core inflation signalled that underlying price pressures were not as bad as some had feared. Prices for a range of goods, including used cars, trucks and clothing, fell versus the previous month, suggesting inflation remained contained. However, the relief could be short-lived, with tensions rising once again in the Middle East.
Elsewhere, US retail sales in the US rose 0.2% month on month in June 2026 following an upwardly revised 1% rise in May and in line with expectations. This marked the smallest increase in five months, as lower petrol prices weighed on receipts at petrol stations, while consumer spending remained resilient in general.
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