3 things to watch on Friday

The focus on Friday could shift to Europe, as the US markets are closed for a holiday, and after a week of intense focus on US tech. Below, we look at the three things to watch as we end the week.

1, The battle for Westminster begins

Andy Burnham won the Makerfield by-election on Thursday and is now an MP. This is expected to lead to a leadership contest within the Labour party, as Andy Burnham ditches Makerfield for Westminster. The question now is, when will he launch a leadership bid? Does he have the 81 MPs needed to back him in any race, and will Starmer resign?

In the past, bouts of political turmoil have triggered bond and stock market sell offs in the UK and the focus will be on the UK bond market later this morning to see how it reacts to the latest news. However, in the run up to the by-election, Burnham softened his stance towards financial markets. Back in May, when it was announced he would enter the race to become an MP, the bond market wobbled, forcing Burnham into a U-turn on his views on the economy. He quickly promised to abide by Reeves’ fiscal rules and to stick to Labour’s manifesto pledges on the economy. This stabilized the bond market, but can it last?

UK Gilt yields rose across the curve on Thursday, in line with European yields and in the aftermath of the BOE meeting. However, in the week leading up to the election, UK Gilt yields have fallen, and the 10-year Gilt yield is lower by 4.5bos over the past month.

Today we will see if the Gilt market can absorb more political change in the UK. Investors will want to know if there will be an orderly transition in power in Westminster, there may also be concern about Andy Burnham’s spending and nationalization pledges, which could threaten to unleash another wave of inflation on the UK economy. The market may focus on who Burnham announces will be in his team, especially the role of Chancellor. If he picks someone to the left of the party, expect Gilts to swoon and yields to rise.

The pound is broadly lower this week, and has sunk 1.6% vs the USD, it has also fallen below the $1.32 handle as Burnham’s win was announced, although it is making a comeback as we move through the morning. GBP/USD is now close to its weakest level of the year so far, it is down 1.6% in 12 months, and it is the weakest currency in the G10 FX space so far this week.

Leading up to this byelection, the market was calm, however, today will be a key test for UK FX and bond markets.

2, Oil creeps higher

The oil price is higher on Friday, and Brent crude is back above $80 per barrel, after reports that US/ Iran talks in Switzerland for today have been cancelled. Market euphoria that a deal had been reached has shifted to some skepticism, as the deal is only interim and is not a peace treaty. There are also concerns about some aspects of the deal, including what it means for Iran’s Gulf neighbors.

Oil could be choppy on Friday, as news about the cancelled talks jostles with reports that more traffic is passing through the Strait of Hormuz. If there is anything that jeopardizes the safety of the Strait, that could trigger a much larger reaction in the oil price, for now, Brent crude is higher by 0.7% today. The oil price may retreat if we hear about a new timeline for talks.

3, Stocks are mixed, but the chip boom continues

News that the US/ Iran talks would not go ahead today also dented sentiment towards Asian stocks. The Kospi, which has been riding high in recent days, dropped 1.5%, and the Nikkei was also lower by 0.7%. European stocks are also set to open marginally lower, although the FTSE 100 could be bolstered by the uptick in the oil price.

US chip stocks surged in the US on Thursday, with big gains for SanDisk, the memory chip maker, Intel, Marvell, Micron and Qualcomm. There were also strong gains for the hyperscalers, which boosted the overall Nasdaq 100, which rose more than 2.1%, driven by large cap growth stocks. Momentum continues to be the key driver of global stocks right now, which means that markets will be reactionary to any headlines that could disrupt the market rally.

So far in June, the market has shown a preference for Asian stocks, the FTSE 100 is one of the weakest performers in the European space so far this year, and the major US indices are picking up the pace in the past week, after a rough start to June.

One stock that did not join in the US tech stock rally on Thursday was SpaceX, which fell for a second consecutive day. Its stock price was down by 3.5%, and the stock price dropped $30 in 2 days. The rally had become parabolic directly after the IPO, so a pause was to be expected. The recent drop in the share price means that SpaceX is no longer worth more than Amazon, which suggests that there is a limit to the market enthusiasm for Musk’s space conglomerate.

With the US markets closed for a public holiday, it could be a quiet drift lower into the end of the week for European indices.