Making sense of this crazy world
It’s all happening in the UK!
Grabbing the headlines this week has been the possible leadership challenge within the Labour Party and the prospects of a new Prime Minister. The likelihood seems to change nearly every hour, and the UK gilt market doesn’t like it one bit. Uncertainty is not looked upon kindly.
We’ll dig a bit deeper today and look at how the gilt market is expected to react to the possible candidates served up by Labour, and its implications. I won’t get caught up in the weeds of a political debate, but one thing is for certain, Labour isn’t connecting successfully with the electorate as last week’s election results demonstrated.
It was only a couple of days ago that the King’s Speech took place. There was nothing new, although King Charles’s performance was seen as statesman-like, coming on the back of his celebrated trip to the US.
Over the last few weeks, we’ve seen defence stocks weakening, which may seem unusual but I’ll explain the rationale later on in this commentary.
A weekly update wouldn’t be the same without an update on Iran and Trump. On Wednesday, the US President arrived in Beijing for talks with the Chinese leader Xi Jinping and, of course, the war in Iran was discussed. Only the day before his visit, Trump repeated his military threats against Iran. He has certainly rolled out the red carpet of verbal platitudes towards the Chinese leader but it suits his interests to do so (right now). Compromise will be the key moving forward, with each entity receiving compensation in the form of other benefits!
Later, we’ll take a quick look at market sentiment and movements this week.
This week’s content:
- UK gilt yield stabilises, but the bond market is on high alert
- Why are bonds key to government finances?
- What Labour leader would the markets favour?
- Implications for UK equities
- What’s happened to defence stocks?
- Trump meets Xi Jinping… a good idea?
- Supply chains adapt to the conflict with Iran
- Is the Chinese economy booming?
- Market movements
- Conclusion
UK gilt yields stabilise, but the bond market is on high alert
Following the initial calls for the Prime Minister to step down, UK gilt yields have calmed. Gilt yields surged above the 5% level on 10-year gilts and pushed towards 6% on 30-year gilts, according to MarketWatch.
An article in Investment Week quoted the comments of Dan Coatsworth at AJ Bell, who stated, “When bond investors get uncomfortable, they sell, bond prices fall and yields rise. Unusually large moves on the bond market tend to get people’s attention, and there is a chance that a continuation of current bond yield trends gives Starmer no choice but to step down”.
Interestingly, the pound is tumbling, falling for its fifth straight day, heading for its worst week since November 2024.
Continues…
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