UK markets digest another black hole in the UK finances, and Astra Zeneca gets NYSE FOMO

Stocks are drifting at the start of Q3 as we lead up to some key event risks. Although President Trump’s Budget bill passed the Senate, he is holding firm with his July 9^th deadline to reinstate reciprocal tariffs on some nations including Japan. European stock indices are higher on Wednesday and US futures markets are also pointing to a higher open, the dollar is broadly higher.

UK Government U-turn on welfare has big fiscal consequences

The bond market is also in focus. Bond yields are rising across Europe and in the US this morning, partly reversing Tuesday’s decline in yields. The focus is on the UK bond market, after another government U-turn on welfare reform. The cost of recent government U-turns, including on winter fuel, is adding up to over £7bn, which will have to be found by either raising taxes, cutting spending or through higher borrowing.

These are not palatable options; however, the vigilantes are not attacking the UK’s bond market at this stage. They may wait to see what the Chancellor will do to enable her to stick to her fiscal rules in the Autumn Budget, after a government minister told the media today that the government will stick by its pledges not to increase tax on ‘working people’. Added to this, the prospect of rate cuts from the Bank of England next month focuses minds on a drop in interest payments for the national debt, which is one bit of good news for Kier Starmer’s beleaguered government.

Bond Vigilantes leave the UK alone for now

UK bond yields are moving in line with European and US yields on Wednesday, and although the pound is lower, this is more down to dollar strength, and all G10 currencies are weaker vs. the dollar today.

The bond and stock markets seem to be ambivalent to fiscal deficits and the risk of rising national debt right now, as the focus is on central bank action and US reciprocal tariffs. Added to this , the UK market does not seem to be pricing in the prospect of political change, after a humiliating week for the UK PM. Right now, a cabinet reshuffle is a near certainty, rather than a new PM.

New York, New York is calling for AstraZeneca CEO

UK shares are higher today, and AstraZeneca is in focus. A media report last night said that the CEO is looking to move the UK’s largest listed company to the US. This would be a massive blow to the UK’s stock market, which is already struggling with a dearth of listings and large companies chasing the allure of higher valuations and higher CEO pay in the US.

Can the government persuade AstraZeneca to stay in the UK?

Astra Zeneca is the latest to fall victim to the bright lights of the New York Stock Exchange. However, after its share price jumped late on Tuesday, it has since given back those gains on Wednesday and is slightly down on the day so far. There has been no official statement from the CEO or AstraZeneca, and the report is based on private conversations only. The threat to move the primary listing to the US could be an attempt to force the government and the NHS to rethink its refusal to offer AstraZeneca’s latest breast cancer drug Enhertu.

The loss of AstraZeneca to the US stock market would heap huge pressure on the UK government and undermine their pledge to boost growth and the UK’s cutting-edge life sciences sector. Thus, Pascal Soriot may have chosen a suitable time to look for a U-turn from the government on this, and it will be interesting to see if a deal is struck between the NHS and the company any time soon.

Although the government cannot block any move by AstraZeneca to move to the US, the board could stop a move. However, there is no denying that the US is an attractive place for pharma companies. It has the highest medicine spend per person in the world and by by far the highest levels of CEO compensation.

Japan shares are victims of US trade negotiations

Japanese shares were the standout underperformers during the Asian trading session for the second day, and in the last two sessions, shares are down nearly 2%. This suggests that tariff fears remain front and centre for traders. The contrast with European indices, which are only mildly lower, is worth noting. The market remains wary, but so far Donald Trump has not singled out the European Union for criticism, which is protecting European shares from a deeper sell off. Of course, if he does start lambasting the EU, then this could spook investors, especially as there is only 1 week to go before the deadline to make trade agreements or face reciprocal tariffs.  

Powell biding his time on rate cuts, brushes off Trump pressure

The broad dollar strength on Wednesday is linked to comments from Fed chair Jay Powell, at the ECB’s global central bank conference in Sintra, Portugal. He reiterated the need for patience when it comes to monetary policy, and to wait for the expected increase in inflation to pass over the summer months. He would not commit to a July rate cut, which highlights his ability to withstand pressure from President Trump who is pushing for aggressive rate cuts.

The interest rate futures market has barely changed on the back of these comments. There is still only a 20% chance of rate cut from the Fed in July, with a 90% chance of a cut in September. Those expecting an early summer cut could be disappointed.

US jobs report in focus

Overall, the focus is on tariffs, and risk sentiment could be impacted by headlines on  the progress of negotiations between the US and its trading partners.  We are leading up to tomorrow’s US labour market report. ADP jobs data is released this afternoon and is expected to show an increase in private sector jobs last month. We will also be watching global bond yields to see if the UK Gilt market reacts to  the potential for more borrowing in the UK economy.