The FTSE 100 was down around 0.5% to 10,227 by early afternoon on Tuesday, caught between a deepening political crisis at Westminster and renewed anxiety over the Iran conflict driving oil prices sharply higher.
Gilt yields reach levels not seen since 1998
The bigger story of the day is in the bond market. 30-year gilt yields hit 5.8%, with 20- and 30-year yields rising around 9-10 basis points to reach levels close to their highest since 1998.
The 10-year yield climbed to 5.1%, up 10 basis points on the day. Market commentators said markets are becoming less tolerant of political uncertainty at a time when borrowing costs are already uncomfortably high.
Investors are pricing in a higher risk premium as speculation around the prime minister’s future, and a possible shift towards a looser fiscal stance, unsettles confidence in the UK’s policy framework. Whoever leads the government next will inherit very tight constraints.
The Starmer crisis deepens
The number of Labour MPs calling for Starmer to resign has passed 77, with Home Secretary Shabana Mahmood the most prominent voice demanding he stand down. Two junior ministers have now quit – Miatta Fahnbulleh from the housing and communities department and Jess Phillips, the minister responsible for safeguarding.
Starmer told his cabinet on Tuesday morning he would not step down. His office confirmed the Labour Party’s process for challenging a leader had not been triggered and insisted the country expected the government to get on with governing.
Gilt yields eased slightly following the statement, though remain far above where they opened. Analysts at Citi warned that current gilt yields do not fully price in an immediate leadership challenge, and that a shift leftward in Labour policy could push borrowing costs and inflation expectations higher still, weighing on the pound and domestically-focused FTSE 250 stocks.
Banks take the brunt
Banks led the FTSE 100 lower at the open, with NatWest, Lloyds and Barclays all falling at least 4%, while Lion Finance, Standard Life, St James’s Place and Prudential dropped 2-3%.
Rising gilt yields hit bank valuations on two fronts, higher borrowing costs squeeze the economic outlook for UK-focused lenders, while any fiscal loosening under a potential successor government raises the spectre of further inflationary pressure.
Vodafone disappoints on buyback pause
Vodafone led the fallers in early trading, down as much as 5.4% after a mixed set of results. A return to growth in Germany was offset by the company’s decision to pause share buybacks in order to take full control of its UK joint venture.
Investors have been watching the German turnaround closely as a key indicator of management execution, making the buyback suspension the sharper disappointment.
Oil adds to the pressure
Brent crude has risen 2.5% to $106 a barrel on Tuesday, adding an energy cost dimension to an already crowded list of concerns. Trump rejected Iran’s latest peace proposal as totally unacceptable on Sunday, and the US president’s remarks that the month-long ceasefire is on “massive life support” have kept traders on edge.
Iran’s foreign ministry described its proposals as responsible and generous, leaving little sign the two sides are close to agreement. UBS warned that a further jump in energy costs alongside fiscal concerns could trigger a sharper sell-off in the bond market, though the bank stuck with its forecast that 10-year yields will end the year around 4.75%.