Starmer comes out fighting, as the bond market is relatively stable, for now

The UK is in focus this morning, as Prime Minister Kier Starmer has given a speech in the aftermath of the local election bloodbath for Labour. This speech was seen as make or break for his position, and he came out fighting, dismissing the prospect of a change in PM. Although the PM faced challenges to his leadership over the weekend, there has been no knockout blow, and so far on Monday, the markets are calm, yields are moderately higher, and the pound remain above $1.36, even though the dollar is higher on a broad basis today.

For now, it looks like the market is not taking Angela Raynor’s proposal for how to reinvigorate the economy and Labour’s chances seriously. She doesn’t seem to grasp policy trade-offs, for example, she says that creating jobs for young people can go hand in hand with a higher minimum wage. Although the polls give a damning verdict on this government’s track record so far, the markets are clearly willing to ignore the internal fighting going on in the Labour party this week.

The relatively mild reaction in the bond market, 10-year Gilt yields are higher by 4bps, and it remains below 5%, suggests that traders do not believe that the threat to Kier Starmer will materialise. It would need a bigger blow to send yields higher, at this stage. If Starmer can get over this challenge, then the focus will go back to the data: can the economy grow, and can the public debt remain stable? If those things change, potentially because of a new leader, then the Gilt market will react.

The biggest announcement in this speech has been a nationalisation of British steel. The merits of doing this during an energy price crisis is up for debate, but if it stops a harder left government taking over the UK, the market may look through this policy. The PM also called for closer relations with Europe, but there was no major policy announcement around this.

Oil price gives back early gains, as market mood remains subdued

After a stunning performance on Friday, with US stocks hitting another record high, the mood is more somber at the start of this week. The focus is once again on Iran. Oil prices initially popped higher after President Trump’s rejection of Iran’s response to the US’s peace proposal. The sell-off in the oil price has eased slightly as we’ve moved through the morning. Reports that Qatar-owned LNG tankers are nearing the mouth of the Strait of Hormuz, if it successfully traverses the Strait, this would be the second successful Qatar tanker to traverse the Strait in 10 weeks.

While this is a tiny fraction of the number of Qatari ships that usually pass through the Strait, it is a step in the right direction and could suggest that tensions in the Gulf are easing, even if Iran and the US are still haggling over the terms of a peace deal. The Brent crude price is still above $100 per barrel and is currently trading just below $104 per barrel. The oil market remains in backwardation, which suggests that the market is holding out hope for a resolution of this conflict, even though the peace process is dragging on, and the conflict is entering its 10^th week.

The price of oil remains highly reactive to news around the reopening of the Strait of Hormuz, both positive and negative, so signs that tankers are getting through the Strait, even if it is a trickle, could weigh on the oil price in the coming days.

Yields are higher across the board at the start of this week, as oil prices rise. US yields are also rising, as rate cuts from the Fed are priced out on the back of stronger payrolls on Friday. Although the Gilt market is not an outlier today, UK yields are marginally higher than elsewhere, and UK yields remain nominally higher than elsewhere in the G7, even though our debt to GDP ratio remains lower than the US, France and Italy.

China/ US summit may boost hopes of a deal with Iran

For now, although the oil price is higher, there is no sign of panic in the market. Wrangling over the details of a path to a peaceful resolution to the conflict between the US and Iran is to be expected. Although it may seem that a peace deal is not within reach, especially when Iran is calling for war damages and sovereignty over the Strait of Hormuz, this is all part of a negotiation. It is also worth watching what comes out of the US/ China summit this week, as Iran will be one of the topics they discuss. China is an extremely important trading partner for Iran, so it will be interesting to see if Beijing can help broker a deal, and the timing of Trump’s trip to China is no coincidence.

For now, although the oil price is rising, the AI trade continues. South Korea’s KOSPI index rose to a record high this morning, as chipmakers rallied strongly. Ahead today, futures prices suggest a slight pullback in US stocks. However, the Nasdaq and the S&P 500 are both close to record highs, and higher oil prices have not got in the way of stronger stocks so far this month, as you can see below. US stocks could struggle today as the big beasts, Nividia, Amazon and Alphabet, are all lower in the pre-market, as markets take a pause and traders digest the prospect of no rate cuts from the Fed this year.

Chart 1: The Nasdaq has rallied to record highs, even as the oil price climbs

Source: XTB