British government borrowing costs are falling sharply this morning on hopes that US and Iranian negotiators will make progress reopening the strait of Hormuz.

UK bond prices are ralling in early trading, pushing down the yield (or interest rate) on the debt.

Investors will be calculating that a peace deal would lead to a recovery in oil and gas flows from the Middle East. That would push down inflation and removing some pressures to raise interest rates.

The UK bond market was closed yesterday, so traders are now able to respond to the news that Tehran and Washington are discussing a framework to end their three-month-old war.

Ten-year gilt yields fell as low as 4.824% at the start of trading, a drop of seven basis points (0.07 of a percentage point). That’s the lowest level since 21 April, before UK yields began rising in early May amid uncertainty over prime minister Keir Starmer’s future.

Longer-dated 30-year bond yields have dropped too – down as much as six basis points to 5.49%, the lowest since 17 April.

Ipek Ozkardeskaya, senior analyst at Swissquote, explains:

Rising oil prices have been fuelling inflation expectations across the globe, putting upward pressure on global yields — in some places to levels not seen since the subprime crisis, and in others to levels unseen for decades.

Shares in UK aerospace manufacturing group Melrose have tumbled around 5% in early trading after its factory in California suffered a chemical leak.

The leak, at a GKN Aerospace manufacturing facility in Garden Grove in Orange County , began last week when a large storage tank containing methyl methacrylate, a highly flammable industrial chemical used to make acrylic plastics, overheated and began venting vapors.

This prompted the Orange County Fire Authority to evacuate almost 50,000 people in the area while emergency services responded.

There were fears over the weekend that the tank would either explode, or rupture and spill thousands of gallons of chemicals, before a “pressure-relieving crack”was discovered that might reduce the danger.

Melrose told the City this morning that the mandatory evacuation area had been “significantly reduced” yesterday, explaining:

At 6pm local time on 25 May, the local authorities confirmed that no injuries, leaks or contamination have occurred. GKN is working closely with customers on operational recovery and supply plans.

The progress made over the last few days is testament to the continued skill and dedication of all the support teams and services involved.

Britain’s stock market has opened higher as investors in the City embrace hopes for a peace deal to end the Iran war.

The London market, which was closed yesterday for the Bank Holiday, is rallying, lifting the FTSE 100 share index by 65 points or 0.63% to 10,531 points.

Airlines group IAG (+3.3%), and jet engine maker Rolls-Royce (2.7%), are among the top risers, along with mining companies.

Italy’s antitrust authority said on Tuesday it had opened an investigation into easyJet Airline Company Limited over alleged unfair business practices, Reuters reports.

The company’s website and app made bundled baggage and sports equipment check-in for round trips the default option, showing only the average service price even when customers only wanted it for one leg of their journey, the authority said in a statement.

Higher prices could persist over the summer even if ceasefire talks between the US and Iran bear fruit, consumers have been warned, with economic shock waves likely to be felt “for many months to come”.

Disruption to global shipping, coupled with soaring prices for energy and raw materials, have driven up costs for UK companies, with the impact already filtering through to prices paid at the tills, according to fresh inflation figures.

Retailers have responded by launching promotions to tempt bargain hunters but businesses said it was getting harder to stave off price increases, and called on the government to go beyond existing measures to help alleviate the pressure.

Shop price inflation is already on the rise, according to figures from the British Retail Consortium (BRC).

Furniture and health and beauty products are among the items that have risen most in recent weeks, driving an increase in shop prices of 1.2% year on year in May. The rate was slightly above the three-month average of 1.1%.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Global investors are clinging to hopes that a US-Iran peace deal could be close, but optimism could be waning after fresh US strikes in the Middle East.

Brent crude oil is creeping back towards the $100 a barrel mark, up 2.5% today at $98.57 a barrel, having dropped below that $100 mark yesterday for the first time in a fortnight.

US and Iranian negotiators are in Doha to discuss a potential end to the three-month war, after Donald Trump declared last weekend that a peace deal with Iran “has been largely negotiated”.

However, yesterday US forces attacked missile sites in southern Iran and boats trying to lay mines, which has created some doubts that a deal is genuinely close.

Jim Reid of Deutsche Bank suggests the US attacks were “a warning shot that the ceasefire is fragile”, explaining:

These actions were described as “defensive” and not an end to the ceasefire with Iran.

Net net, optimism is still elevated that an agreement can be made to end the war. We have been here before, of course, but it has felt for some time that the move towards peace has been three steps forward and one or two back.

There are encouraging moves in the government bond market too. The yields (or interest rates) on US debt have dropped today as prices rally, lifted by hopes that a peace deal will reopen the strait of Hormuz and ease the inflationary pressures hitting the world economy.

Wall Street, which was closed yesterday, is on track to open higher.

Markets have become more “risk-sensitive,” reports Daniela Hathorn, senior market analyst at Capital.com, who cautions:

Markets are still leaning optimistic, but the tolerance for negative headlines is shrinking. If negotiations stall further or the Strait disruption worsens, the reaction across oil, yields and equities could become much sharper than it has been over the past few weeks.

The agenda

• 11am BST: CBI distributive trades survey of UK retail for May

• 1.30pm BST: Chicago Fed index of US National Activity for April

• 2pm BST: S&P/Case-Shiller index of US house prices