IN UK politics, Andy Burnham became the new Labour Party leader and was sworn in as Prime Minister on Monday.
Financial markets have been calmer since press reports suggested Home Secretary Shabana Mahmood is expected to become Britain’s next Chancellor, but markets will be monitoring policy announcements closely once the new government takes office, especially with the ten-year UK Government bond yield hovering around a 5% yield.
Mahmood has already suggested moving the highest band of income tax back to 50%, contrary to Labour’s manifesto pledges, while Burnham continues to evaluate wealth taxes. The press expects a “blitz of policy announcements”, potentially covering everything from devolution and social care to North Sea energy and housing.
These political developments come at a time when investors are also assessing the underlying strength of the UK economy. May saw modest but encouraging results, with GDP expanding by 0.1% month-on-month, ahead of expectations for no growth. Over the past three months, the economy has grown by 0.7%, while annual growth stood at 1.3%, slightly below the 1.4% consensus forecast. Growth was driven entirely by the services sector, which rose 0.3% during the month.
Strong contributions came from professional and scientific services, alongside increased healthcare activity and consumer-facing businesses benefiting from warm weather and stronger retail spending. While the figures suggest the UK economy remains more resilient than many had expected, there are still reasons for caution.
Higher oil prices, together with broader domestic political and geopolitical risks, could place pressure on household spending and business investment in the months ahead. Nevertheless, the data indicates that the UK has so far avoided the sharper slowdown many economists had anticipated.
While the domestic economic picture has been relatively encouraging, developments overseas continue to pose potential risks, with tensions in the Middle East a key focus for investors. Following an escalation between the United States and Iran, oil prices and energy stocks initially moved higher, although the broader markets remained relatively resilient.
The US has launched further strikes aimed at limiting Iran’s ability to threaten shipping through the Strait of Hormuz, while US President Donald Trump warned that military action could be expanded unless Iran returned to negotiations. Against this backdrop, Brent crude oil prices rose to around $85pb.
In Europe, the corporate earnings backdrop continues to improve, and stocks contained within the main index are expected to deliver 11.5% year-on-year earnings growth in the second quarter, representing the strongest aggregate expansion since the first quarter of 2023 and the best performance in three years. This marks a meaningful improvement following a prolonged period of subdued profit growth that has weighed on European equity market performance.
Elsewhere, South Korea’s central bank surprised markets by raising interest rates for the first time in over three years, increasing its benchmark rate from 2.5% to 2.75%. The move reflects robust economic growth driven by strong demand for AI-related semiconductor exports, alongside persistent inflationary pressures, rising house prices and elevated household debt levels.
Policymakers also signalled that further rate increases may be required, highlighting how the global AI investment boom continues to influence economic and monetary policy trends beyond the major Western economies.
