Susannah Streeter, Chief Investment Strategist, Wealth Club: “There has been no Burnham bounce for UK assets following Labour's victory in the Makerfield by-election, but equally there has been no battering from uneasy investors. Financial markets are taking the political developments largely in their stride. It’s been more of a ‘meh’ reaction as investors appear to have got used to political shenanigans at Westminster and appear to have already factored in the likelihood of a leadership challenge.
The FTSE 100 is flat in early trade, while sterling has edged down against major currencies and gilt yields have ticked higher. The muted moves suggest investors are still weighing up what the result means for the future direction of economic policy. For now, that may be because Andy Burnham has promised to be more cautious about spending by largely sticking to fiscal rules. He also appears willing to tackle the large benefits bill, arguing that welfare reform should focus on helping more people into work. His pledge to bring down huge welfare costs, partly to fund higher defence spending, is a signal that he is positioning himself closer to the political centre, which may be providing some reassurance.
The latest government borrowing snapshot highlights the tricky fiscal tightrope he’ll have to walk if he does get the keys to Number 10. UK borrowing increased in May by almost a third compared to the same month last year, reaching £23.3 billion. Interest payable on government debt shot up to £11.7 billion – the highest ever recorded for the month. It highlights the need to keep bond markets on side and demonstrate that his policies will be aimed at bringing down long-term borrowing, with credible plans for reviving growth.
For now, investors are balancing the political uncertainty which is swirling against signs of a bit more resilience in the UK economy. Retail sales came in stronger than expected in May, offering fresh evidence that consumers are spending a little more than expected despite higher borrowing costs and ongoing pressure on household finances. The figures provide some encouragement that consumer demand is holding up better than anticipated. Nevertheless, confidence remains fragile. Although the latest GfK survey showed consumer sentiment holding steady rather than deteriorating further, households continue to face a challenging backdrop of elevated living costs and sluggish economic growth.
The modest rise in gilt yields may also indicate that investors are reassessing the outlook for interest rates following the stronger retail sales data. While the Bank of England left rates unchanged, evidence of resilience in consumer spending may reinforce expectations that policymakers will remain cautious about higher prices being given freer rein to filter through.
Attention also remains focused on the agreement between the United States and Iran. Although the deal appears to be a step towards greater stability in the Middle East and a potential boost to global energy supplies, there is still a risk it hands Tehran significant economic benefits without securing stronger concessions. Brent crude has recovered to just under $80 a barrel, suggesting traders remain wary about the balance between increased supply and the risk of tense geopolitics flaring up again.
Wall Street ended the trading week on another surge of AI enthusiasm. Markets are closed today to mark Juneteenth National Independence Day, and investors were in a holiday mood, snapping up technology companies. The Nasdaq surged 1.9%, while the S&P 500 climbed 1.1%, as investors piled back into stocks focused on artificial intelligence developments despite concerns that valuations are becoming increasingly stretched. With hopes that the Iran conflict is in the rear-view mirror and inflationary pressure will start to calm, there are also hopes that borrowing costs won’t be pushed higher despite signs of dissent around the Fed table.”
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