UK markets declined this week, with the FTSE 100 Index falling 0.87% to trade at 10,255 points at the time of writing. The pound climbed above $1.36 on Friday, close to a two-month high, as investors assessed the fallout from UK local and devolved government elections.
Early election results showed Nigel Farage’s Reform UK gaining traction in English councils, while Prime Minister Keir Starmer’s Labour Party lost around half the seats it was defending. The Conservative Party also faced significant losses, surrendering over a quarter of its seats, while the Greens nearly doubled their count and the Liberal Democrats made progress. Despite a disastrous night for Labour at the polls, Starmer has refused to quit, insisting “I’m not going to walk away and plunge the country into chaos”. Labour is heading for the worst local election results by any party this century. Labour losses in English councils, where about 5,000 seats are up for grabs, are expected to continue to accumulate. Losses of between 1,500 and 2,000 seats have been predicted in the 136 council areas holding elections.
British government bond prices were little changed following the early results of the local elections, with long-term borrowing costs hovering close to their highest level in nearly 30 years. The yield on 30-year gilts, which hit its highest level since 1998 this week amid worries about a possible change in leadership of the government and its borrowing plans, as well as the Iran war, was unchanged at 5.632%. Yields on gilts ranging from two to 20 years in duration were also flat.
British government borrowing costs have risen more sharply than those of other European governments since the start of the Iran war on worries about the country’s resilience in natural gas for power generation and home heating.
Commodity markets
In the commodity markets, Brent crude futures traded around $100 per barrel on Friday and are set for a weekly fall as investors evaluated the prospects for a Middle East peace deal. However, Oil resumed its rally towards the end of the week after the US and Iran exchanged fire in the Strait of Hormuz, fanning fears that the fragile ceasefire between the two countries was unravelling and threatening continued disruption to shipping via one of the world’s most critical oil routes.
Washington and Tehran accused each other of initiating attacks in the Strait of Hormuz, further straining a ceasefire agreement already weakened by repeated allegations of violations. The flare-up came as Iran is reportedly reviewing a US proposal to end the war. US President Donald Trump insisted that the ceasefire remains in effect. In a Truth Social post, Trump said US forces had wiped out the Iranian targets involved in the clash, including small boats and drones. He also warned that Iran would face further military strikes if it failed to agree to a nuclear deal.
Analysts at Citi said they expect broader financial markets to stabilise despite recent volatility linked to the Middle East, though the bank warned that the path towards normalisation is unlikely to be smooth and could keep oil prices elevated in the months ahead.
Gold prices traded around $4,720 an ounce on Friday and are set for a weekly rise, as falling oil prices helped ease inflation worries, boosting the appeal of holding non-yielding bullion.
Equity markets
US equity futures rose on Friday as investors continued to assess developments in the Middle East. In Thursday’s regular trading session, the Dow Jones Industrial Average fell 0.63%, the S&P 500 lost 0.63%, whilst the Nasdaq Composite declined 0.13%.
US stocks reached record highs this week amid strong earnings from companies aligned with the artificial intelligence boom. Bosses from JP Morgan and Blackrock have both played down talks of an artificial intelligence bubble in separate comments about demand for the technology, as well as spending on the sector.
JP Morgan Chase’s Chief Executive Jamie Dimon said the $1 trillion investment in data centres will make sense in the long haul because of the power of AI technology, underscoring Wall Street’s appetite to fund an unprecedented level of spending on tech infrastructure. Dimon said the spending would also include vast sums for things such as chips, wires and hardware, but that “technology tends to pay for itself, just not in a straight line”. His comments come as banks are hunting for ways to offload risks tied to a glue of data centre debt as the race to build out AI infrastructure stretches financing limits among the largest global lenders.
BlackRock CEO Larry Fink echoed Dimon’s optimistic stance towards demand for artificial intelligence technology, saying there was “not an AI bubble”. Fink argued that there is the opposite, with supply shortages and demand growing faster than anyone had anticipated.
Elsewhere, Donald Trump’s 10% global tariffs have been ruled illegal by the US Court of International Trade, which judged on Thursday that the 10% tariffs, imposed under Section 122 of the Trade Act of 1974, were “unauthorised by law”. The court did not suspend the tariffs broadly but only for the two companies that brought the case.
The ruling is the latest setback for President Trump’s trade policy after the US Supreme Court earlier this year ruled the President could not issue tariffs using emergency economic powers. Judges at the Court of International Trade in New York came to their decision by weighing what Congress meant by “balance-of-payments deficits” when they wrote the legislation in 1974. Lawyers representing the businesses bringing the case argued that a trade deficit and a serious balance-of-payments crisis were not the same. President Trump imposed the new 10% baseline tariff with immediate effect following the removal of his “liberation day” tariffs.
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.