Pound hit by Labour leadership crisis as yields spike, stocks slide and crude climbs as Trump departs China

Pound hit by labor leadership crisis as yields spike, stocks slide and crude climbs as Trump departs China

We began the week talking about inflation risks, UK political risks and Trump’s visit to China and we’re still talking about them. Yields are backing up sharply on both sides of the Atlantic for a mix of reasons, whilst labor’s leadership crisis is having a clear impact on sterling. And what exactly did Trump achieve with that visit to China?

European stock markets were sold across the board on Friday after President Trump’s visit to China wrapped up with actually not a lot to show for it … had all the hallmarks of two sides playing nice for the cameras. Oil prices rose as Trump said China would buy US oil; South Korean chip stocks fell hard as one US official said chip export controls were not discussed in detail, leading Asian shares lower, particularly tech. European markets have followed suit with the FTSE 100 down –0.8% with miners Fresnillo, Antofagasta and Anglo American hit hard as silver fell -6% and copper dipped -4%, while gold edged down -2% to $4,550 to test the 6 May low. Meanwhile the DAX was trading –1% lower on the session. It doesn’t look like there is meaningful progress on Iran either, which is maybe adding a bit of bid to crude after Trump said earlier this week he’s in no rush to reopen the Strait of Hormuz.

The labor leadership contest is on: Wes Streeting resigned and opened the field to allow Andy Burnham, who has found an MP willing to give up his seat, a chance to run. Gilt yields spiked with both the 10yr and 30yr opening up about 10-11bps higher, though just running a little ways below the multi-decade highs already posted this week. Reform could make it nasty for Burnham in Makerfield but as someone put it to me yesterday, labor voters will turn out for him because they’ll actually be voting for the PM. It’s a unique by-election. Markets won’t like it and they won’t like the idea of the labor party anointing a left-leaning PM whose fiscal views are well known – as are his views of the bond market. Ultimately the bond market is likely to impose fiscal discipline, but it can get messy before that happens. And the UK’s fiscal position gets increasingly fragile every day that the Strait of Hormuz is shut.

So where is the gilt market at right now? Basically pricing in uncertainty and a likely leftwards shift rather than full-on statist push into nationalisation, wealth taxes and extra borrowing. There is a non-negligible chance that the market could overdo the risks from a Burnham leadership – a lot would depend on his choice of Chancellor. The situation remains very complex, however if we try to boil into simple terms for investors, the UK is in a very difficult position economically, fiscally and politically with no one seemingly able to come up with a credible plan to fix the nation’s finances and secure growth. Inflation and yields are resetting at a higher level for the UK, which is not a good look for the currency.

Sterling has tripped up with GBPUSD sliding as low as 1.333 where it’s at a 5-week low, though the dollar side is driving a chunk of the price action as USD is firmly bid across the board. Nevertheless, the pound also hit its weakest against the euro since 8 April, so we can definitely see that the politics is hammering sentiment towards sterling. Political uncertainty and fiscal risks coupled with a fresh injection of ‘moron premium’ (this time of a decidedly leftist flavor) should pressure sterling, though it won’t fall as fast as it might due to the carry from the yield differential.

It’s not the UK that is seeing yields sharpen – US front yields moved up sharply yesterday with the 2yr touching cycle highs at 4%, last touched late April, which saw the dollar climb and notched a couple of important technical breaks, with EURUSD breaching the 5 May low on the downside to hit a 2-week low, while USDJPY cleared 158 to also hit a two-week high. GBPUSD slumped below 1.35 further as the political weakness in the UK met this technical USD buying. US 30yr yields were also higher above 5.05%.

This has extended overnight as the dollar picked up fresh bid after President Trump departed China following a summit that was largely more show than dough. I think the market was hoping for something on Iran but alas no. Trump suggested he wasn’t bothered if the Strait opened “at all”. Brent rose above $107 again, whilst the dollar appears to be benefitting on haven plays – EURUSD broke out to the downside to a 5-week low 1.163 to test its 50-day moving average. USDJPY moved firmly through the 158 handle but’s met resistance at the 50-day line around 158.7 with some bid for JPY coming in overnight as Japan’s wholesale inflation rose 4.9% in April, twice the forecast rate.

Some data yesterday emphasised the market is still short inflation risks. US retail sales held up, rising 0.5% month‑on‑month in April, which was in line with expectations but eased from a downwardly revised 1.6% increase in March. Sales jumped 2.8% at gasoline stations – excluding these retail sales were up 0.3%. And inflation worries were demonstrated in the import/export price data for April. Import prices for April +1.9% versus 1.0% estimated and prior month revised higher to 0.9% from 0.8%. Export prices for April +3.3% versus 1.1% expected and prior month revised lower to 1.5% from 1.6%. It comes after the hot PPI and CPI reports earlier this week.

Inflation concerns are not worrying equity investors on Wall Street as the S&P 500 posted its first close above 7,500, hitting fresh intraday and closing highs, while the Dow Jones Industrial Average jumped 370 points to retake the 50,000 level. The Nasdaq Composite was +0.88% as it too scored new all-time intraday and closing highs.

Cisco’s 13% gain was a big boost to the Dow, while Nvidia rallied +4% as the US cleared around 10 Chinese firms to purchase the company’s H200 chip. Boeing dipped almost –4% as China’s agreement to purchase 200 jets fell short of expectations for the trip.

Elsewhere, crypto stocks rallied along with Bitcoin as the Senate Banking Committee met to discuss the Clarity Act; legislation that will create a regulatory framework for cryptos. The likes of MARA, Coinbase, Cleanspark, Galaxy Digital and Strategy advanced 4-5% Bitcoin rose from $79,000 to above $81,500 before trimming gains as the bill advanced the committee but now faces a key Senate vote on the floor which will depend on bipartisan support. Two Democrats supported the bill but said they may not support it on the floor – I think they need 7 Democrats to pass it…banks hate the idea of stablecoin yield competing away their margins on deposits.