Hopes remain high for a US/ Iran deal, as stocks rally and bonds recover

UK economic data to end the week showed weaker than expected retail sales for last month. This was driven by subdued motor fuel sales, as the price of petrol and diesel rocketed. This caused consumers to change their behavior, after stocking up on fuel in March. This suggests that the war in Iran, and surging oil and fuel prices, is causing demand destruction.

The UK has adapted quickly to the war in Iran, however, the risk is that it weighs heavily on growth in Q2, after a stronger than expected economic performance in Q1. This data has not had too much of an impact on the pound, which is down a touch on this news, but remains above $1.34.

UK public sector borrowing data was also released this morning. Borrowing was £24.3bn in April, 25% more than April 2025. This was driven by rising cost of benefits, which can be directly attributed to the government’s benefits binge in the last budget, and rising debt interest costs. So much for securenomics. The new candidates for Labour’s leadership, should remember this when they put together their economic plans. The tax burden is at a record high, and debt is getting increasingly expensive.  

Public sector net debt was 94.2% of GDP. While this is favorable compared to some of our neighbours in  Europe and the US, the fact that the tax take increased last month at the same time as borrowing for April  was at its highest level since 2020, is a sign that the UK’S public sector spending is out of control. This could limit the recovery in Gilts, even if UK yields have retreated this week.

As we end the week, the market continues to hold out hope that there will be a resolution to the conflict in the Middle East. The oil price has been volatile but is lower on the day and is currently below $105 per barrel for Brent crude. Brent is lower by 4.7% so far this week, which is boosting the market mood as we move into the weekend.

The market continues to think that a deal between the US and Iran is likely, even if we have had mixed messages from both sides. The US has said that a deal is near, but Iran cannot have a nuclear weapon, whereas, Iran has said that it wants to keep its uranium stores. From a trading perspective, it is best to ignore the noise and rhetoric from both sides and concentrate on the numbers. Lower oil prices and bond yields can keep stocks supported in the short term, even if the longer-term outlook depends on the full reopening of the Strait of Hormuz.

It looks like it could be a winning week for stocks. The Dow Jones is up 1.5%, and hit a fresh record high on Thursday, the S&P 500 is higher by 0.5% and the Nasdaq is up 0.2%. European indices are outpacing their US counterparts so far, and have reversed losses from earlier this month. The FTSE 100 is higher by 2.4% and the Dax is up 2.7%.

At the same time as stocks are rising, bond yields have retreated this week. UK yields have been extremely volatile in the past week. Concerns about a change in PM and a shift to the left under Andy Burnham sent yields surging last week, yet losses have now been reversed. The UK’s 10-year yield is down 22bp this week and is only higher by 4bps so far this month. What has triggered this reversal? The main driver has been worse labour market data and lower than expected inflation. This has virtually eradicated the possibility of a June rate hike from the BOE. Added to this, although a shift even further to the left is bad news for UK bonds, the commitment from Andy Burnham and Wes Streeting to stick to Rachel Reeves’ fiscal rules is placating the bond market for now.

Overall, we think that the market has been too negative on the UK. Growth has been better than elsewhere, especially continental Europe, and we could see further Gilt outperformance vs. Europe in the coming weeks, as long as Burnham and co. stick to orthodox economic policies.

There’s also been a turnaround in the FX market this week. After falling sharply last week, the pound is managing to eke out a 0.8% gain vs. the USD this week and is trying to claw back sharp losses from earlier this month. This does not mean that we should expect a rally back to $1.36 in GBP/USD, but it does suggest that $1.33 is solid support.

Tech stocks helped to drive US indices back into the green on Thursday, but investors showed no mercy to Nvidia. The stock slipped 1.7% on Thursday, even though 24 hours before it delivered a monster earnings report. Revenue growth of 80% YoY, strong forward guidance and shareholder sweeteners were not enough to boost the share price, and the world’s most valuable company bucked the overall trend for US stocks this week and is lower by more than 4.5%.

Overall, unless there are signs that US/ Iran deal hopes are fading, or that the ceasefire is threatened, then the positive risk sentiment could be maintained into the end of the week.