Developments in the Middle East were not the sole focus for global markets last week.
Instead, attention turned to UK politics, with Sir Keir Starmer announcing his resignation as Prime Minister and leader of the Labour Party last Monday. The departure, likely triggered by Andy Burnham’s Makerfield by-election victory on the previous Friday, makes Starmer the sixth UK leader to have resigned in under a decade. Andy Burnham is the frontrunner to succeed him, with Labour leadership nominations opening on 9th July and a new leader expected before Parliament returns from its summer recess, in September.
Despite the big news, the market’s response was measured rather than reactive, suggesting participants had largely priced in the event. 10-year gilt yields initially rose on Monday morning on reports the Prime Minister was making a statement but lowered shortly after the announcement. They continued to fall over the week, and closed the week at 4.7%, lower than the level prior to Burnham’s by-election victory. UK 10-year & 30-year gilt yields are broadly back where they were at the end of March, following intermediate volatility, and are both up c.20 basis points year-to-date respectively.
Elsewhere, oil markets continued to stabilise as Middle East tensions eased further. Brent crude fell as low as $72.40 on Thursday, below its level before the conflict began, as commercial tankers resumed transiting through the strategically vital Strait of Hormuz.
US Equity Market:
It was a choppy week for Wall Street as markets weighed up signs of cooling AI enthusiasm against renewed conviction, following a strong earnings release from semiconductor company, Micron. The S&P500 and Nasdaq stock indices began the period drifting lower, something analysts attributed to investors growing increasingly cautious of the massive AI infrastructure spending by technology mega caps – notably Alphabet, Meta, Amazon and Microsoft all suffered pullbacks. The share price for Elon Musk’s SpaceX has also now declined over 30% from its $225 peak reached the previous week.
The pessimism in stocks somewhat halted midweek, when chipmaker Micron announced a near 15-fold surge in quarterly profits – a jump in net income to $28.2 billion for the fiscal quarter to May, up from $1.9 billion in the same period last year. This sent the company’s shares up almost 16% in after-hours trading. Micron produces memory chips widely used in data centres that train and host AI models. The prices for these chips have soared due to supply shortages, thus providing a massive boost to profits.
Over the week to Friday, the S&P 500 and Nasdaq indices fell 1.94% and 4.23%, respectively.
UK Equity Market:
Despite being dominated by political transition, UK markets were relatively subdued last week. The FTSE 100 index was largely insulated from broader volatility, due to many of its constituent companies deriving a significant portion of their earnings internationally. Banking stocks NatWest, Barclays and Lloyds led the way on Monday, all climbing over 3% as investors pondered the impact of the Prime Minister’s resignation announcement; meanwhile, mining names lagged, due to softening oil and metal prices. The FTSE 100 index closed the period to Friday up 1.43%.
Though sterling is down around 3% against the US dollar since February, it had a stable week last week, trading at $1.32 for much of the period. Analysts attributed this lack of a reaction to the fact that a prolonged Labour leadership battle had been avoided, rather than of reflection of a positive market verdict on Andy Burnham. Investors’ attention will now turn to what fiscal policy could look like under a new leader, and whether Chancellor Reeves and her existing framework will remain in place.
Inflation, Interest Rates and Bond Markets:
As noted, UK 10-year gilt yields briefly touched 4.87% last Monday, before settling back down to around the 4.70% level by Friday. Market focus appears to have shifted from the resignation event towards the likely policy direction of an Andy Burnham-led government. Bond markets continue to price UK government debt as comparatively more risky than international peers – and with it perceived that Burnham intends to adopt a looser fiscal approach, this may well remain the case.
In the US, evolving interest rate hike expectations under new Fed Chair, Kevin Warsh, added to bond market volatility – with the 2-year Treasury yield reaching as high as 4.25% last Monday for the first time since February 2025. It retreated as the week wore on, however, alongside falling oil prices. The release of personal consumption expenditure index data last Thursday showed inflation had surged to 4.1% in the 12 months to May – above 4.0% for the first time since April 2023 and significantly above the Fed’s 2% target, adding to hawkish sentiment. As such, markets now price in a rate hike as soon as September and a likely further increase after that.
What’s on the horizon
Investors will continue to monitor the development of talks in the Middle East between the US and Iran. In the UK, eyes will be on the Labour leadership contest, the prospect of any challengers to favourite Andy Burnham, and early signals for the fiscal direction a Burnham government may wish to take.
In the US, job openings, nonfarm payroll and unemployment data, will all be released – providing a good indication of whether hiring momentum is holding up amidst the Fed’s more hawkish tilt. The release of manufacturing purchasing managers’ index (“PMI”) on Thursday will also offer insight into the health of the world’s largest economy. Meanwhile, France, Italy and Germany will all release inflation data on Tuesday, followed by figures for the wider eurozone area on Wednesday.
This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.
Past performance is not a guide to future performance.
The value of your investments can go down as well as up and you may get back less than you originally invested.
Source of financial market data: MorningstarDirect.