Weekly Market Review

Burnham and bonds

Bond markets have a long history of keeping politicians in line. In the 1990s, Bill Clinton scaled back spending plans after US Treasury yields rose sharply, prompting adviser James Carville to joke that he wanted to be reincarnated as the bond market because it could “intimidate everyone”.

Andy Burnham appears aware of that discipline. When he announced his candidacy for the Makerfield by-election in mid-May 30-year gilt yields were close to 30-year highs at 5.85%, reflecting concerns about future government borrowing. Longer-dated gilts are especially sensitive to political risk because they rely heavily on confidence in the government’s long-term finances.

He has since tried to reassure investors by backing the government’s current fiscal rules and surrounding himself with experienced economic advisers, including Andy Haldane, Richard Hughes and Jim O’Neill.

His recent speech repeated that message, with a clear commitment to not take risks with the public finances. However, the lack of detail means investors still have some unanswered questions.

Plans for devolution, council housebuilding and greater local control of public services could require significant investment, but it is too early to judge the full fiscal cost or how it would be funded.

The choice of Chancellor will also be key. Ed Miliband is currently seen as the most likely candidate, and while parts of his policy agenda, notably net zero, have raised concerns among businesses and voters, the role will be as much about reassuring markets as shaping policy.

So far, gilt markets have been cautious rather than alarmed. Thirty-year gilts sold off by 7 basis points this week, but by less than US Treasuries, and they strengthened over June. Markets appear to be giving Burnham the benefit of the doubt, although some political risk is already reflected in longer-dated gilt yields.

For clients, our view is unchanged: the extra yield on longer-dated gilts does not yet compensate for the added uncertainty. We prefer shorter-dated gilts, where we see better value and more potential benefit if the economy slows.

The broader fiscal backdrop remains challenging. A reported £5bn defence spending gap, heavy gilt issuance and the BoE’s continued reduction of its gilt holdings all mean Andy Burnham and his new Chancellor will need to tread carefully.

Sharp jobs miss eases hiking pressure

June US nonfarm payrolls rose just 57k, well short of the 113k consensus, with prior months revised lower. The unemployment rate fell to 4.2% as labour force participation dropped. The miss prompted an immediate dovish repricing with two-year Treasury yields falling around 8 basis points to near 4.1% before recovering modestly into the close while the US dollar fell more than 0.5% against sterling on the day.

Taken together, softer labour market data and lower energy prices suggest the inflation backdrop facing central banks is becoming less challenging, offering some relief even as geopolitical tensions remain a key source of uncertainty.

Iran talks take place although situation remains fragile

US-Iran indirect talks in Qatar delivered little tangible progress this week, although the continuation of dialogue remains a positive development and helped ease oil prices. Key sticking points remain unresolved, including shipping through the Strait of Hormuz, Iran's nuclear programme and the release of frozen assets. The contrasting rhetoric from both sides was notable, with Donald Trump claiming that the “denuclearisation of Iran is moving along very well”, while Iranian officials maintained that discussions were centred on frozen assets and US compliance with June's Memorandum of Understanding.

While shipping flows through Hormuz have improved, the situation remains fragile and mine-clearing operations will continue to pose logistical challenges even if diplomatic progress is made. Talks are expected to resume after the funeral period for Ayatollah Ali Khamenei, which concludes on 9 July.