Market report: Scorching energy prices set to push up borrowing costs
Susannah Streeter, chief investment strategist, Wealth Club: With the standoff over the Strait of Hormuz continuing and safe passage seemingly only guaranteed for luxury mega-yachts, rather than shipments relied on by many millions, it’s keeping worries about an energy crunch front and centre. There are plenty of repercussions rippling through the global economy, not least higher borrowing costs. This looks set to put the brakes on advances for the internationally focused FTSE 100 as concerns collide about the impact on global fortunes and the UK economy.
The benchmark, Brent crude, is still hovering around the painful level of $111 a barrel, a three-week high, and the big worry is that as companies have to shoulder elevated bills for longer, they’ll have little choice but to pass on the costs through higher prices, while employees will clamour for higher wages as inflation rises.
Although this week, with crucial central bank meetings taking place, policymakers are set to stay wary and are likely to press pause, the expectation is that the only way is up for interest rates as the year wears on and vital supplies of commodities remain constrained.
Financial markets are now pricing in as many as three rate hikes from the Bank of England. It’s a marked difference from last week’s expectations of just one hike. As a result, fresh repricing of mortgage deals higher is looking more likely. There had been some respite, with offers lower than the peak they reached in mid-April, but they could well move higher again given the volatile changes in market expectations.
Worry about the expected ramp-up in rates is showing up in the bond markets. Gilt yields have risen above 5%, levels not seen since the financial crisis, which means it’s becoming more expensive to finance UK government debt. At a time when calls are rising for extra help to support cash-strapped households and businesses, rising borrowing costs mean the Treasury is seeing any wiggle room for additional support rapidly evaporate, with more revenue set to be absorbed by debt interest payments. This means the government may be forced to make increasingly difficult choices – bring in higher taxes or tighten public spending elsewhere.
With the Middle East conflict still fraught with uncertainty, it’s keeping travellers super cautious. This has come through loud and clear in the trading update from Jet 2 this morning. Although there’s no dramatic drop off in demand so far, it seems holidaymakers are more wary, holding off on booking until closer to departure. This shift is squeezing forward visibility just as the all-important summer season approaches, making it harder for Jet2 to read the runway ahead with confidence. However, Jet 2 is buffered against the turbulence given that it has a robust fuel hedging strategy in place and its hefty cash pile provides a reassuring safety net. Nevertheless, the longer the Strait of Hormuz remains closed, the greater the risk that pressure builds, particularly as Jet2 looks to recoup the £11m in startup costs tied to its new base at London Gatwick Airport.
Wall Street looks set for a higher open as investors await a raft of big tech earnings, which are expected to show strong demand for AI technology. However, with capacity constrained, there’s an ongoing ramp-up in capital expenditure to meet the huge appetite for infrastructure to support advances in artificial intelligence. How big the mismatch is between growth in spending and growth in revenue looks set to determine investor sentiment, given the mega valuations of the tech giants and their weight on indices.
The longer the Strait of Hormuz continues to be blocked, the greater the uncertainty about the summer travel season.
Jet2 plc expects its financial year 2026 operating profit to be between £435m and £440m, aligning with market expectations, despite £11m in startup costs for its new London Gatwick base. The company maintains a strong balance sheet with £3.3bn in total cash and £2.0bn in net cash as of March 31, 2026, having returned £363.0m to shareholders. For the upcoming financial year 2027, Jet2 has increased its Summer 2026 capacity by 7.7% to 19.9 million seats, with passenger bookings up 6.2%, though geopolitical uncertainty is impacting visibility for the peak summer season. The airline has a strong fuel hedge position, with 87% of its summer requirement hedged at an average price of $707 per metric tonne.”