Starmer Out, Burnham On the Way
Sir Keir Starmer has announced his resignation as Prime Minister. It seems almost a certainty that Andy Burnham will replace him, especially since his main rival, Wes Streeting, has now publicly endorsed him.
Given the result in the Makerfield by-election last week, this morning’s news is no surprise. Markets, therefore, are unfazed. Pound sterling, UK gilts, and the FTSE All-Share are all stable.
When Burnham’s route to power initially became apparent, the pound and gilts fell in value, given his previous comments declaring that “we’ve got to get beyond this thing of being in hock to the bond markets”. Yet, having seen such a negative market reaction, he has since made more fiscally prudent statements, committing to the government’s existing borrowing limits. He has also promised to stick to Starmer’s manifesto pledge not to raise the main rates of income tax, VAT, or National Insurance. While readers may well take this last statement with a pinch of salt, given the government’s prior treatment of the tax pledge, it does show that Burnham is aware of the need to at least attempt to keep the markets on side.
A recent article summarised Burnham’s election strategy as ‘Big spending vibes, small spending commitments’. This is how he is trying to win over traditional Labour voters without scaring the markets.
The challenge is that, having gained such political momentum on a promise to deliver the economic change that voters feel Starmer failed to enact, Burnham will soon face the same constraints that government brings. There is very little space in the nation’s finances: if he wishes to increase spending (which much of the Labour Party want), cuts will be needed elsewhere, and this will prove just as unpopular as when Starmer and Reeves attempted to do so.
Iran Peace Deal and Oil Market Dynamics
For global investment markets, the more important story relates to the Memorandum of Understanding signed by the US and Iran, which aims to bring peace to the Middle East. The deal should allow the reopening of the Strait of Hormuz in exchange for sanctions relief and a significant redevelopment programme. A 60-day negotiation window is now in progress, with nuclear controls being the biggest aspect. There is significant scope for renewed tensions if discussions break down.
For now, markets are responding positively. The oil price, which peaked above $110 per barrel in the early stages of the conflict, was around $90 prior to the peace deal emerging and is now below $80. The price remains elevated relative to pre-conflict levels of approximately $70, but the progress is clear.
Several factors suggest further downward pressure. There is a substantial backlog of supply waiting to enter the market, including tankers stranded in the Persian Gulf during the conflict, as well as Iranian production returning to global markets. Structural dynamics also point to increased supply: the UAE’s recent exit from OPEC signals a willingness to expand production, particularly given its relatively low extraction costs.
At the same time, demand may well soften. While not as politically popular as a few years ago, the transition towards renewable energy sources continues, and, given the risks highlighted by Iran’s closure of the Strait of Hormuz and the downsides of oil dependence, this could accelerate. A small example of this is a jump in European EV purchases over recent months.
Inflation and Interest Rates
Higher oil prices have fed into recent inflation data, but with prices now easing, this impact should begin to fade. The outlook for inflation and interest rates remains mixed, with regional differences becoming increasingly pronounced.
In the United States, inflation has ticked higher, with CPI rising to 4.2% from 3.8% in April. The Federal Reserve, now under the leadership of Kevin Warsh, held rates steady at 3.5%–3.75% at its latest meeting but signalled that a rate hike later this year remains likely. Policymakers appear cautious, wary that geopolitical disruptions could lead to more persistent inflation.
The eurozone has already seen a rate increase after earlier easing measures arguably went too far, reflecting a similar concern around inflation persistence.
In the UK, the picture is more nuanced. CPI came in below expectations at 2.8%, despite upward pressure from fuel and travel costs. This was offset by lower food and domestic energy prices. Interest rates stand at 3.75%, and while markets continue to anticipate a potential rate rise later this year, the case is far from clear-cut.
On one hand, the Bank of England has predicted that inflation will rise later this year as higher energy costs filter through the system. On the other, economic momentum is weakening. The UK economy contracted by 0.1% in April, and wage growth in the private sector has slowed to 2.9%, its lowest level in five years. Taken together, these factors argue for caution from Andrew Bailey and his Bank colleagues.
Equity Strength and the AI Investment Theme
Despite the geopolitical uncertainty, equity markets have continued to benefit from the ongoing strength of the AI sector. Strong earnings from US technology firms have been mirrored by exceptional performance in Asia, particularly among semiconductor manufacturers in South Korea and Taiwan.
The recent listing of SpaceX has shown the extent of investor enthusiasm for high-end technology. With a valuation of $2.4 trillion, it has already become one of the world’s largest companies. There are also upcoming IPOs from OpenAI and Anthropic, alongside further listings from technology giants such as Amazon, Microsoft, and Alphabet. This shows that companies are looking to cash in on the continued excitement around the sector as a way to fund their massive spending plans.
While this suggests healthy markets now, it also adds risk. Many of these companies remain loss-making, with valuations driven by future potential rather than current earnings. Should sentiment toward AI weaken, the downside could be large.
Portfolio Positioning and Outlook
Assuming the Iran peace process holds, further declines in oil prices should occur over the coming months, which would help ease inflationary pressure. This, in turn, reduces the likelihood of aggressive interest rate increases and supports a constructive outlook for equities.
While AI-driven growth remains a key theme, markets are beginning to broaden out beyond a narrow group of mega-cap stocks, a development that is generally healthy. Reduced geopolitical risk would further support this trend.
Current positioning in the investment portfolios managed by Future Money reflects these dynamics. A bias away from US large-cap equities and toward Asian markets has been beneficial, and the fund manager feels this has further to run due to more compelling relative valuations. Within fixed income, caution is warranted. While near-term inflation risks are easing, longer-term concerns, particularly around government borrowing, persist, leading to a continued preference to avoid long-duration bonds.