European stock markets are broadly lower in early trading, as the deadlock over the Middle East conflict worries investors.
France’s CAC 40 index is down 0.75%, while Germany’s DAX has lost 0.2%.
In London, though, the FTSE 100 is up 29 points or 0.3%, with banks and oil companies among the risers.
Government bond yields are rising across the board this morning, although UK debt is leading the losses.
US and eurozone borrowing costs have also pushed higher, on concerns that the lack of progress towards ending the Iran war will lead to higher oil prices, more inflation, and higher interest rates.
German 10-year bund yields, for example, are up 2 basis points this morning, while UK 10-year gilt yields have risen by 5bps.
US 10-year Treasury yields are also up 2bps.
Shares in British high-performance polymer maker Victrex have dropped by almost 7% after it told shareholders its annual profit would miss expectations as the Middle East conflict threatens to push up energy and raw material costs.
Victrex is also planning to reduce its workforce by around 10%.
Victoria Scholar, head of investment at Interactive Investor, explains:
Inflationary headwinds as a consequence of the conflict in the Middle East are weighing on a number of UK businesses. We have already heard from companies like Next, Asos, Sainsbury’s and WH Smith which have warned of higher costs. Now shares in Victrex have shed almost 6% today on the back of a profit warning. It anticipates weaker annual profit before tax of between £42m and £44m for fiscal 2026, falling short of estimates for £46.6m. First half underlying pre-tax also profit dropped by 18% to £19m.
The UK mid-cap polymer maker says the Iran war will push up energy and raw material inflation. The company is responding by reducing headcount by 10% to cut costs elsewhere.
Shares are down 12% year-to-date and have shed nearly 40% over a one-year period. Analysts have a mixed assessment on the stock with a consensus hold recommendation, according to Refinitiv.
The possibility of a new, more left-wing British prime minister and chancellor, and fears over the Iran war, are both pushing up UK borrowing costs today, argues Neil Wilson, investor strategist at Saxo UK.
After sliding for much of the latter part of last week gilt yields have jumped this morning on the political risk premia associated with a potential defenestration of Starmer and Reeves, but also due to the situation with Iran and oil price spike.
Fiscal loosening is not what the market wants to see at a time of existing pressures on finances, a fragile fiscal position, and higher borrowing costs due to the war. No fireworks yet but we could see some outsize moves should a leadership contest be triggered. Bond vigilantes are watching, waiting.
UK government borrowing costs rise as pressure builds on Starmer
UK goverment borrowing costs have risen at the start of trading, lifted by inflation concerns and uncertainty over Keir Starmer’s future.
The yield, or interest rate, on UK 30-year bonds is up around six basis points (0.06 of a percentage point) at 5.63%.
The benchmark 10-year bond yield has also risen, up 5bps to 4.96%.
Yields rise when bond prices fall. These moves reverse the falls seen on Friday, when Starmer pledged to stay on as prime minister despite the poor local election results.
Today, the PM is due to give a speech in which he’ll promise to “face up to the big challenges”, but his position is looking more precarious after 40 Labour MPs called for him to set a date to step down, and Labour backbencher Catherine West threatened too launch a “stalking horse” challenge if Starmer didn’t set out a timetable to step down.
Investors may be anticipating that a change of leadership would result in higher government spending, and borrowing.
Michael Brown, senior research strategist at Pepperstone, explains:
The triggering of a leadership election, and a subsequent change in Prime Minister, leaves the GBP [the pound] and Gilts [UK government bonds] not only grappling with a ratcheting up of political uncertainty, but also being forced to face up to a likely more left-wing successor to Starmer.
Such an outcome would, in all likelihood, lead to a substantial loosening of the ‘fiscal rules’, along with considerably higher government spending, and even higher taxes, possibly even including a manifesto breach in raising NI, VAT, or income tax.
But… the jump in the oil price is also a factor pushing up government bond yields, as it threatens to create higher inflation, making it harder for central banks to cut interest rates.
Updated
China's factory inflation hits 45-month high
The Iran oil shock has pushed Chinese factory inflation to its highest in nearly four years.
China’s producer price inflation has jumped to a 45-month high of 2.8% in April, up from just 0.5% in March, National Bureau of Statistics (NBS) data showed.
The NBS attributed higher factory-gate inflation to rising prices in sectors such as non-ferrous metals, oil and gas and tech equipment.
Consumer price inflation in China has also jumped, up to 1.2% in April from 1% in March.
Lynn Song, economist at ING, explains:
The impact of higher energy prices stemming from the Iran war was clear in the [consumer inflation] data. We saw a 17.4% YoY surge in energy for the transportation subcategory, which rose 11.5% month-on-month after a 10% spike in last month’s data.
China’s gasoline prices have risen by less than crude oil prices since the start of the Iran War, suggesting that there’s still likely upside ahead for this subcategory if oil prices stay elevated. The impact of higher energy prices stemming from the Iran war was clear in the data. We saw a 17.4% YoY surge in energy for the transportation subcategory, which rose 11.5% month-on-month after a 10% spike in last month’s data.
China’s gasoline prices have risen by less than crude oil prices since the start of the Iran War, suggesting that there’s still likely upside ahead for this subcategory if oil prices stay elevated.
Pound slips against rising dollar
Sterling is making a poor start to the new trading week, dropping by half a cent against the US dollar.
The pound has dropped to $1.358, wiping out most of Friday’s gains. Traders are watching political tensions built in Westminster, as the uncertainty over Keir Starmer’s future could weaken demand for UK assets.
But dollar strength is another factor this morning.
Tony Sycamore, analyst at IG, tells us:
Some of that [the pound’s weakness] is to do with the US dollar catching a bid on the reopen this morning on risk aversion flows after the Iranian response to the US peace plan.
Heathrow's April passenger numbers fall as Middle East conflict disrupts travel
The Iran war has hit passenger numbers at the UK’s largest airport.
Heathrow has reported this morning that passenger numbers in April fell 5% to 6.7 million, which it says reflects “the ongoing impact of the Middle East conflict on some markets and short-term adjustments to travel plans”.
The airport is also planning to review its 2026 passenger forecast, and update it in June.
Heathrow CEO Thomas Woldbye says:
“We know passengers want certainty when planning their hard-earned summer holidays, so we are supporting Government and airlines as they work through their plans to get passengers on their journeys.
While we have seen some short‑term disruption linked to the Middle East conflict, demand for travel remains strong with current fuel supplies stable. April was still our busiest month so far this year, underlining the strength of a global hub airport that can adapt quickly in times of uncertainty.”
On Item Club’s forecast of falling employment this year, a UK government spokesman says:
“Recent figures show that there was an improvement in the labour market at the beginning of the year with unemployment falling below 5%, and 332,000 more people in work than a year ago.
“But we cannot escape the effects of the war in the Middle East which are likely to feed through to prices and employment in the coming months.
“We will do everything we can to support the country through this period, including by slashing energy bills by up to 25% for 10,000 manufacturers.
“Our mission for clean power by 2030 will get us off the rollercoaster of fossil fuel prices, to cut bills for businesses and households for good.”
Oil jumps 4% as Trump brands Iran’s response to peace plan ‘totally unacceptable’
The oil price has jumped 4% this morning as hopes of a breakthrough in the US-Iran peace talks falter.
Brent crude, the international benchmark, is rallying after president Donald Trump said on Sunday that Iran’s response to a US proposal was “unacceptable”.
The ongoing deadlock is fuelling supply fears as the Strait of Hormuz stayed largely closed.
Brent crude futures are up $4 or 3.95% this morning at $105.30 a barrel.
Mohit Kumar, economist at Jefferies, argues that we are still moving towards a deal, but both parties want to have an upper hand in negotiations, telling clients:
Both Trump and Iran rejected each other’s proposals to end the war. Iran refused to dismantle its nuclear program, which has been the key demand from Trump. The Strait of Hormuz remains practically closed. Trump does want a deal, but he needs to show to his supporters that US managed to secure a deal on nuclear, which was the whole point of going into the war.
UK set to shed 163,000 jobs amid Iran war fallout
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The economic woes caused by the Iran war are expected to cost the British economy jobs this year.
With no sign of an end to the conflict, the latest regional outlook from the Item Club shows the UK economy is expected to shed 163,000 jobs this year.
It warns that lower income regions – such as South Wales and the Humber – will be hit hardest by the economic shock from the Middle East.
Both areas are heavily reliant on manufacturing and construction industries, which are suffering from higher energy costs and supply disruption.
Item Club, an economic forecasting group, predicts 5,700 jobs will be lost in South Wales, and 2,800 in the Humber over the year.
But the economic damage from the energy shock will run wider – as households across the country cut back on discretionary spending in the face of a surge in the cost of living.
That will hit the retail and hospitality sectors, with Item Club predicting that employment in London will drop by 25,000 this year as its retail and hospitality sector slows, with a 12,500 reduction in Birmingham, 9,800 drop in Leeds and 6,200 decline in Glasgow.
Tim Lyne, economic adviser to the Item Club, says:
“Some of the lowest income regions will feel the biggest effects of the manufacturing and construction sectors reducing headcount in the face of rising energy prices and supply chain disruption.
“While consumers in these areas typically have less rainy-day savings, which will reduce spending in the retail and hospitality sectors.”
This forecast of rising unemployment will not lift the government’s spirits, with Keir Starmer facing a fight for his political life today after last week’s local election results.
The agenda
1pm BST: UK Finance hosts ‘Growth Delivery Summit’
3pm BST: US existing home sales report for April
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