Gilt-y by association

• US equities, which advanced +2.30% in sterling terms
• Oil, with Brent Crude rebounding +5.67% in dollar terms

• UK mid- and small-cap equities, which fell -2.20% and -1.84% respectively
• Sterling, which fell -2.05% against the US dollar and -0.83% against both the euro and the yen
• Gold and silver, which declined -3.77% and -4.10% respectively in dollar terms

UK borrowing costs again nudged multi-year highs, after a bruising week for Prime Minister Starmer left his premiership hanging in the balance. With investors fretting that a more left-leaning and fiscally profligate government might emerge from the current melee, the 10-year gilt yield topped 5.17% and the 30-year yield 5.85%. Andy Burnham – who faces several hurdles before even challenging Starmer – is currently seen as a leading contender.

The government’s own independent economic forecaster, the Office for Budget Responsibility (OBR), may have to bake higher yields into its projections if they persist. With the 10-year gilt yield rising from 4.2% before the Iran war, today every 0.5% increase will cost roughly £6bn more in annual debt interest payments by 2029-2030. The UK’s relatively high proportion of index-linked debt in issue – roughly 25% compared to 7% for the US, for example – compounds the issue. 

For foreign buyers of UK gilts, prolonged political uncertainty isn’t good. They currently own around one third of UK debt, and may demand a still-higher yield as compensation should the uncertainty not alleviate. But for domestic investors, 5%-plus gilt yields – driven higher by risk – may paradoxically offer some protection in uncertain times – particularly if global economic activity were to slow markedly as a result of the ongoing impasse in the Middle East. Last week’s latest UK GDP print indicated the economy grew +0.3% in March however, confounding forecasts of a contraction as the impact of the Iran war filters through to official statistics. Statisticians believe that consumers and businesses may have brought forward spending in March, fearful of future price rises.

The potential leadership challenge also saw sterling slide. At one point it had fallen by c. -2.5% against the dollar to 1.33. UK equities also weakened, with concerns of inflation and higher oil prices compounding political risk. Fractured domestic and foreign affairs: a formidable test for whomever is in power.

US President Donald Trump met Chinese counterpart Xi Jinping in Beijing last week. The visit had been delayed by more than a month due to the onset of the Iran war. Although relatively little in the way of substantive agreements or deals were formally announced, the summit did seemingly strengthen the fragile trade truce between Beijing and Washington. The existing truce has been in place since the US suspended hefty tariff increases and China rowed back from blocking the export of critical rare earths last year.

Incremental steps regarding the framework for trade and investment between the world’s two largest economies emerged from the talks. And Trump later noted prospective Chinese purchases of Boeing aircraft and US soybeans and energy. Boeing has been largely shut out of the Chinese market because of trade tensions. Nvidia has similarly been restricted from selling into Chinese markets by US export controls. So, reports that the tech behemoth was given clearance to sell one of its most advanced chips into China could provide another boost for the Artificial Intelligence (AI) related tech sector. 

Geopolitical wrangling hung over the summit. The US would like China to apply diplomatic pressure on Iran and hasten the reopening of the Strait of Hormuz. Trump later stated that President Xi expressed a desire to see the Strait open and personally offered his assistance on the matter. But the Chinese foreign ministry was more reserved, calling for a "a comprehensive and lasting ceasefire", and for shipping lanes to be “reopened as soon as possible in response to the calls from the international community". China’s official readout following the summit also contained warnings around Taiwan and its importance to Chinese-US relations, cautioning they could sour considerably if the matter was "mishandled”.

While the summit did not yield any transformative breakthrough, slightly lessened trade uncertainty should aid investor sentiment at the margin. Trump extended a return invitation for Xi to visit the US later in the year.

Kevin Warsh was finally confirmed as the new Federal Reserve (Fed) Chair by the US Senate last week, commencing his four-year term at a sensitive moment. Seen as generally market-friendly, he has previously demonstrated a willingness to lower interest rates – 

likely aligning more closely with the views of the current US administration. However, Warsh faces a challenge guiding a Federal Open Markets Committee (FOMC) disinclined to ease monetary policy whilst balancing another inflation spike. President Trump regularly rebuked Warsh’s predecessor, Jerome Powell, for not cutting rates quicker.

On the matter of inflation, the latest US print came in largely in line with expectations, easing fears of a sharper rise. The Consumer Prices Index (CPI) rose +0.6% for the month in April – bringing the year-on-year rate to +3.8%. The main driver was unsurprisingly energy prices, which jumped +3.8% over the month, although inflation pressures were also evident from various other areas. With the ongoing impasse in the Middle East keeping energy prices elevated, and labour market data proving relatively resilient, the balancing act for the Fed remains a delicate one. For the time being, a ‘higher for longer’ stance on interest rates is likely to persist as the FOMC remains in ‘wait-and-see’ mode. The short-term focus will shift to the next CPI release on 10 June and Warsh’s first Fed meeting as Chair on 16-17 June.  

China’s annual inflation rate rose to +1.2% in April, up +0.2% from March’s 1.0% print. The reading came in ahead of expectations and extends China’s positive price growth to seven months. Higher energy and transport costs drove the increase, while core inflation (which excludes volatile food and energy prices) also picked up, potentially signalling some recovery in domestic demand. The shift away from deflation is encouraging for global growth, though Chinese policymakers are expected to remain cautious. 

Chinese policymakers have long tried to tackle weak domestic consumption and bring about a rebound in prices. Subdued household consumption and persistent deflationary pressures have been a consequence of a prolonged property market slump and slower economic growth generally. However, the current primary driver of price rises is an external energy price shock, not any material improvement in supply-demand dynamics. And the prevailing situation could bring new challenges for an export-led economy. Substantial energy reserves have protected China’s economy since the closure of the Strait of Hormuz, while its exports have remained resilient. But Iran was a major supplier of oil to China, and China's exports are reliant on demand from global trade partners – many of which are also having to confront the fallout from the standoff in the Middle East.

• UK retail sales: Consumers pulled back on spending in April, especially on travel and big-ticket purchases, as they came to terms with the impact of the Iran conflict. The British Retail Consortium (BRC) measured a -3.4% year-on-year fall in retail sales, significantly below expectations for a +0.8% rise
• The Saudi Arabian Oil Company: State-owned Saudi Aramco announced a +26% year-on-year jump in its first quarter profits. The company’s East-West Pipeline proved key, reaching full capacity of seven million barrels of oil per day while the blockade of the Strait of Hormuz remains
• South Korean stocks: A senior presidential aide is thought to have triggered a more than -5% fall in the South Korean KOSPI share index, after suggesting tax revenue generated from AI could be redistributed to citizens. The South Korean index has surged c.+74% since the beginning of 2026, as demand for AI-related technology benefited the likes of Samsung Electronics
• Samsung Electronics: The South Korean government are closely monitoring a pay dispute between Samsung and its workers. Semiconductors accounted for c.37% of the country’s total exports in April, and if workers begin a planned 18-day strike its impact could be felt at a national level
• US Securities and Exchange Commission (SEC): The regulator is working to rescind a requirement which would have forced companies to disclose climate-related risks. The rule had been challenged in the courts. In a statement the SEC Chair spoke of returning the regulator to its “core mandate”
• Japan yen policy: US Treasury Secretary, Scott Bessent, held a discussion in Tokyo over currency market intervention. The US administration had voiced concerns over a weak yen, with Japan thought to have spent more than $60bn recently to support its currency. A weak yen could unfairly favour Japanese exporters. The US is likely to prefer tighter Japanese monetary policy as a means of supporting the currency

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.