UK borrowing costs at highest level in years
UK bond yields have now hit new multi-year highs.
The yield, or interest rate, on UK 10-year bonds has now risen to 5.15%, their highest level since 2008 and above the high set earlier this week when pressure was mounting on Starmer after last week's local elections.
Thirty-year bond yields also rose, hitting 5.813%, slightly above the 28-year high hit on Tuesday.
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Closing post
Time for a quick round-up…
The pound is heading for its worst week in 18 months on Friday as City traders anticipated that the UK prime minister, Keir Starmer, could face a challenge from the Manchester mayor, Andy Burnham, later this year.
After days of uncertainty over Starmer's future, sterling dropped by around three cents, or 2.2%, during the week to $1.332 on Friday, a five-week low. That would be the largest weekly drop against the US dollar since Donald Trump's election win in early November 2024.
The pound fell against the dollar every day this week as leadership tensions gripped Westminster, culminating in the prospect of Burnham challenging Starmer for the role of PM after the Greater Manchester mayor announced he would run for parliament in the north-west constituency of Makerfield.
UK borrowing costs have hit multi-year highs too, which economists blamed on political uncertainty and also a wider sell-off in bonds as inflation fears hit markets.
In other news:
FTSE 100 finishes at lowest close since end of March
After a rough day's trading, Britain's stock market has closed firmly in the red.
The FTSE 100 share index has ended the day down 117.5 points at 1,0195, a fall of 1.71%. That's its lowest close since the end of March.
Mining stocks and utilities were among the big fallers, as investors anticipated a burst of growth-sapping higher inflation as oil price keep rising.
Van Reenen: Labour’s economic policy is paying off
Heather Stewart
Rachel Reeves's former chief economic adviser John Van Reenen has written a punchy defence of Labour's economic policy, which he argues may be starting to bear fruit in the form of increased productivity.
In a blogpost, the LSE professor criticises what he calls “the traditional British love of misery and the media's obsessive negativity towards the governmentâ€.
He reckons annual productivity growth may have been as high as 1.6% since Labour came to power – up from less than 0.3% a year in the previous decade – helped by financial stability and increased private investment; but also, possibly, the early benefits of AI.
Recent adverse moves in the bond markets are, he argues, because there is “no credible political alternative,†to Reeves's approach.
You can read the full piece here.
UK firms warned to take ‘active steps’ to protect against emerging AI threats
Kalyeena Makortoff
The Treasury, Bank of England and Financial Conduct Authority are warning City firms to take “active steps†to counter the threat of new AI models, following heightened concerns over Anthropic's Mythos.
In a joint statement published on Friday afternoon, the authorities outlined a number of expectations for regulated firms, which they said should ensure their investment in AI defences reflected the “emerging threat†, and that they were using automated/AI defences that can “operate at comparable speed to AI driven attacks.â€
They also said firms should make sure they had proper insurance for when things went wrong, and plans to quickly respond to and recover from any disruption.
The statement comes as government and regulators come under growing pressure to address the rising threat of new AI models including Anthropic's Mythos.
Anthropic, which is the company behind the Claude family of AI tools, has said that its latest model, Mythos, poses an unprecedented risk because of its ability to expose flaws in IT systems.
If Anthropic's warnings are correct, having Mythos fall into the wrong hands could wreak havoc on banks and potentially put the wider financial system at risk.
ING: Political uncertainty pushing interest rate expectations higher
There are signs today that political uncertainty is starting to fuel those Bank of England rate hike expectations, say analysts at ING:
double quotation mark Two rate hikes are priced by November and a third by March 2027. And even more interestingly, markets are not pricing in subsequent rate cuts over a two- or three-year horizon. Perceptions of the neutral rate – the level neither expansionary nor restrictive for the economy – have been repriced higher.
Concerns about a ‘Truss-style' episode are hurting gilts, but there’s more to it….
UK bond yields are still sharply higher as we approach the end of trading for the week.
Tom Ross, head of high yield at Janus Henderson Investors, points out that global bond yields are moving higher – due to inflation worries.
Ross says:
double quotation mark “We are seeing a strong repricing higher in global yields today, driven by a combination of idiosyncratic factors and shifting macro expectations. In the UK, political uncertainty, including concerns around potential instability reminiscent of a ‘Truss-style' episode is adding pressure to gilt yields. There was no meaningful agreement from the Trump–Xi summit after two days of talks which also weighed on sentiment.More broadly, investors are repricing oil higher for longer and factoring in a more persistent inflation backdrop. In Japan, stronger-than-expected wholesale inflation reinforces this narrative, with producer prices rising 4.9% year-on-year in April, well above expectations.
Overall, investors are also shifting their Fed expectations, even following the confirmation of a new Fed Reserve Chair perceived as relatively dovish, highlighting a growing market conviction that inflation risks may ultimately dominate the policy outlook.
The market is starting to get its head around is the impact of AI, Ross adds:
double quotation mark Whilst we continue to believe the longer term impact of AI will be deflationary, the short term impact of the huge wave of data centre rollout is inflationary.
This morning's Sunday Times rich list is continuing to cause a stir, especially among those who are pushing for a fairer Britain.
As covered this morning, the report shows that the combined wealth of the UK's richest 350 individuals has risen to £784bn.
The High Pay Centre have said this is an insult to hard working employees who continue to see their pay stagnate.
Andrew Speke, executive director of the High Pay Centre, warns that without serious reform, disparities will continue to widen:
double quotation mark “Given the consistency with which such extreme figures have been reported over the years, there is a danger that they become normalised. Even a fraction of the wealth increase of these individuals could be transformational for the UK's ailing public service investment, funding better education, improved health outcomes and wage increases.Of course, more progressive wealth taxation will be essential to addressing these disparities. However, it is also crucial that policymakers recognise the inherent inequalities that exist pre-taxation as a result of unequal access to opportunity, disparities in income and the weak extent of employee ownership in companies across the UK.
While there is a system of weak corporate governance and accountability, this disparity is not accidental or surprising; it is a feature of how value is distributed within the UK economy. Without meaningful reform, it will continue to widen. This year's Rich List must serve as a wake-up call for politicians seeking to understand and address the UK's wider economic malaiseâ€
Green Party leader Zack Polanski says such huge riches reinforce the need for a wealth tax:
double quotation mark “The Sunday Times Rich List is an obscene reminder that even while most of us struggle, the extreme rich are getting richer. The 10 richest people this year have a combined wealth of £11bn more than the 10 richest from the previous year.This isn't just disgusting; it is a moral and practical failing of our political system. The case for a wealth tax has never been clearer. A small tax on these outrageous hoardings of wealth could raise tens of billions every year.â€
Inflation worries are hitting Wall Street today too.
The Dow Jones industrial average has dropped by 412 points, or 0.8%, in early trading to 49,650 points, while the tech-focused Nasdaq is down 1.6%.
Insurance group Hiscox is defying today's sell-off, after becoming the City's latest potential takeover target.
Shares in Hiscox are up 12.5% after Insurance Post reported that Canada-based Intact Financial Corp was exploring a potential bid for the British insurer. That pushed Hiscox to the top of the FTSE 100 risers.
British 10-year government bonds are heading for their biggest daily tumble in over a year today, Reuters points out.
The UK stock market is also having a tough day.
The FTSE 100 share index has tumbled by almost 2%, shedding 203 points to trade around 10,168 points.
We can't blame Andy Burnham for that, though! Instead, markets appear to be gripped by inflation worries, as the oil price rises.
Saxo UK investor strategist Neil Wilson explains:
double quotation mark We can factor in renewed inflation anxiety on worries over the Middle East with President Trump suggesting he doesn't need the Strait of Hormuz open, which combined with a lack of any meaningful progress on Iran from the talks in China has pushed up crude prices and raised inflationary angst.
