All eyes are on the bond market today as the fallout from the local elections over the weekend increases the likelihood of a Labour leadership challenge.
Investors are worried that a Left-wing leader such as Angela Rayner would mean higher spending funded by tax hikes and borrowing, which would trigger the ‘bond vigilantes’.
The Prime Minister will set out another ‘reset’ speech later this morning.
If underwhelming, it could be the final straw to push his rivals to break cover and call for his resignation. He is already facing an immediate leadership challenge if the ‘stalking horse’ candidate Catherine West gets the required 81 backers.
The FTSE 100 opened 22 points higher, or 0.22 per cent, to 10,256, while gilt yields also jumped at the opening bell.
The 10-year gilt yield rose by more than 5 basis points in early trade to 4.968 per cent, while the 30-year jumped to 5.64 per cent.
It came as the price of Brent crude rose to around $105 after Donald Trump dismissed Iran’s response to his latest attempt to de-escalate the conflict.
In a post on Truth Social, the President said: ‘I have just read the response from Iran’s so-called ‘Representatives.’ I don’t like it – TOTALLY UNACCEPTABLE.’
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Investors worried about lurch to the Left
Some investors will now see Starmer’s departure as a case of ‘when, not if,’ but that is already causing unease in markets.
Should he be ousted imminently, the options are limited and likely to be either Angela Rayner – who would take the Party further to the Left – or centrist Wes Streeting.
If Rayner is backed by enough MPs, that could push gilt yields higher. Even if the contest is delayed and the stars align for Andy Burnham to return to Parliament, investors are unlikely to take much comfort from the Manchester Mayor, who said Britain was too ‘in hock to the bond markets’.
Ahead of Starmer’s speech at 10am, there has been a modest reaction in the bond markets. The 10-year gilt yield is up 4 basis points to 4.95 per cent, while the 30-year is up around 4 basis points to 5.62 per cent.
Russ Mould, investment director at AJ Bell said: ‘Bond investors have already been worried by the prospect of higher inflation linked to the Middle East conflict, and now they’re starting to squirm in their seat at the idea we might get a different prime minister and chancellor driving an agenda of increased borrowing and spending.’
FTSE flat and bonds surge as speculation mounts
The FTSE has lost most of this morning’s gains, trading up just 6 points by lunchtime at 10,238.
After an underwhelming speech, Starmer is now facing further speculation over his future as ‘stalking horse’ Catherine West MP is expected to send a letter to Labour MPs.
That has pushed long-dated bond yields higher, with the 10-year now up 6 basis points to 4.979 per cent, while the 30-year yield is up 8 basis points at 5.66 per cent.
Eon buys Ovo to create largest energy supplier
German energy giant Eon has confirmed it will buy challenger Ovo in a deal that will create Britain’s largest energy supplier.
The deal between the two firms solidifies the shift towards a small number of suppliers having a firm grip on Britain’s energy market once again, as challengers struggle with rising costs.
Bond markets unmoved
Starmer’s speech was as underwhelming as commentators expected, leaving bond markets largely unmoved.
Heathrow reports fall in passenger numbers as Middle East conflict hits
Heathrow has reported a dip in traveller numbers in April as the Middle East conflict continues to disrupt travel.
Passenger numbers fell 5 per cent year-on-year to 6.7million last month, as flights were cancelled and rerouted, and travellers pressed pause on booking trips away.
Passenger numbers from the UK and the EU were relatively flat, but Heathrow suffered a 52.4 per cent drop year-on-year in passengers from the Middle East.
However, Heathrow boss Thomas Woldbye said demand remained strong with ‘current fuel supplies stable,’ adding that April was ‘still our busiest month so far this year.’
It said it would provide an updated annual passenger forecast next month.
The travel industry is hoping that the impact of the war with Iran will be temporary before a rebound in bookings this summer. That will depend on how quickly the conflict can be resolved, which is becoming less likely as the weeks go on.
Overnight, Donald Trump dismissed Iran’s response to the latest attempt by the US to end the war as ‘totally unacceptable’.
Compass ups profit guidance
Away from the political drama of the day, Compass Group provided some welcome respite from the doom and gloom.
The catering group struck an upbeat tone as it raised its annual profit outlook. In an update to investors, Compass said it expects full-year underlying operating profit growth above 11 per cent, up from 10 per cent.
Shares rose more than 4 per cent at the open, putting it among the FTSE 100’s top gainers.
Chris Beauchamp, chief market analyst at IG said: ‘It is quite refreshing to see an update where the current geopolitical situation doesn’t really feature.
‘Compass did nod towards the potential for more disruption, but the main focus was on a slight upgrade to guidance. Given the general tone of RNSs these days, this provides a welcome change and should put some more strength into the shares after a miserable 2025.’
Compass said new contract wins were up 14 per cent to $4.1billion, with around half coming from organisations outsourcing food services for the first time.
‘That points to a structural shift rather than a short-term boost,’ says Mark Crouch, market analyst at eToro. ‘Particularly as businesses continue looking for ways to cut costs and improve efficiency.’
Underlying operating profit for the six months to the end of March jumped 12 per cent to $1.84billion, while organic revenue grew 7.2 per cent.
Bond markets jittery
The political backdrop of a potential leadership challenge is sending jitters through markets and Starmer’s speech later this morning is unlikely to calm those nerves.
Investors’ main concern is that Labour will lurch further to the Left to appease the membership and stem their losses to the Green Party. Angela Rayner’s intervention on Sunday – to bring back Andy Burnham or else – has added fuel to that fire.
The 10-year gilt yield, which moves inversely to the price, rose by more than 5 basis points in early trade to 4.968 per cent, while the 30-year jumped to 5.64 per cent. The equivalent German, French and US bond yields were up between 1 and 2 basis points.
‘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,’ says Neil Wilson of Saxo. ‘No fireworks yet but we could see some outsize moves should a leadership contest be triggered. Bond vigilantes are watching, waiting.’
FTSE 100 in the green
The FTSE 100 jumped as much as 0.45 per cent a few minutes after the opening bell, but has since settled up 32 points, or 0.31 per cent, at 10,265.
The index is led by British Airways owner IAG, up 3.79 per cent, and Compass Group, which jumped 3.19 per cent after raising its profit guidance.
BP and Shell were also among the biggest risers as Brent crude climbs to $105 a barrel.
Richard Hunter, head of markets at ii said: ‘The FTSE 100 has been something of a beacon of light throughout the conflict for the most part, underpinned by the stability and defensive qualities of many of its constituents.
‘The latest progress takes the index to a gain of 3.5 per cent in the year so far, with international investors seemingly positioned to turn to the index in more volatile times such as these.’