Market report: UK’s political drama collides with energy price worries
Susannah Streeter, chief investment strategist, Wealth Club: “There’s a downbeat mood at the start of the week as worries about a global energy crunch collide with fresh instability on the UK political scene. The FTSE 100 has opened on the back foot and has struggled to gain ground, with little sign of optimism to provide any lift from its recent doldrums. Sentiment is also being dragged lower by signs of weakness in China as retail sales slowed sharply in April and industrial production also decelerated. This snapshot of slower demand in the world’s second-largest economy is weighing down mining stocks.
Brent crude, the benchmark, has raced above $111 a barrel, as fears of a fresh escalation in the Iran conflict take hold. Hopes of any kind of fast resolution have faded as Tehran and Washington appear poles apart in their demands. There had been some expectation that talks in China between Trump and Xi Jinping might help prompt a breakthrough, but that has not materialised.
In the meantime, an attack on a nuclear power plant in the UAE has caused a fresh wave of worry. The ceasefire is falling apart at the seams, and nerves are frayed. A US waiver, which had enabled the temporary purchase of stranded Russian seaborne crude oil, has also expired, which further limits global supplies of oil. Rising crude prices, though, are a boon for listed energy giants, with BP and Shell gaining from fears of ongoing geopolitical fracture.
Amid these heightened global tensions, the Downing Street drama is adding to the unpredictability. At a time when the UK needs stability and a doubling down on efforts to attract investment, it’s having the opposite effect. Fears that the energy crunch would set off an inflation surge had already rattled bond markets.
At a time when the UK needs stability and a doubling down on efforts to attract investment, it’s having the opposite effect. Gilt investors are the canaries in Labour’s coalmine, demonstrating the increased wariness with which the UK is being viewed. The recent sell-off in UK government debt has spiked yields, which is set to increase the amount the government has to pay in interest and will therefore act as a fresh squeeze on government spending. The yield on 10-year gilts remains highly elevated, edging towards 5.2% – highs not seen for 18 years, while longer-dated debt has also sold off heavily, with 30-year gilt yields at 5.86%, levels last reached in January 1998.
So, just at a time when Starmer’s challengers are calling for higher spending, and companies are crying out for tax relief, the political debacle is making both increasingly impossible. Labour’s leadership league is now dominating the airwaves, filling the gap left by Eurovision. The suited and booted contenders are chasing the Downing Street glitterball, but risk trampling chances of growth in their pursuit.
Anglo American is shape-shifting again, shedding its steelmaking coal business in Australia. This is part of its transformation from a sprawling diversified resources group into a far more focused copper and iron ore producer. Its sale to privately held UK company Dhilmar involves an upfront payment of US$2.3bn on completion and a price-linked earnout worth up to US$1.575bn over five years. This not only strengthens the balance sheet, ahead of its planned merger with Canada’s Teck Resources, but also keeps it exposed to future strength in coal prices. So while it’s exiting what’s viewed as a non-core business, it’s still set to capture returns from a volatile but important market for global steel production. Anglo is spinning plates here but at different speeds. It’s still rapidly pursuing copper and iron ore, which are seen as long-term structural growth drivers, but this deal will give it extra flexibility and ongoing revenues from coal, at a time when Anglo is facing highly capital-intensive projects expanding copper production.”