Top stories
Sir Keir Starmer announced that he will step down as UK Prime Minister and leader of the Labour Party. Nominations to replace Starmer will officially open on 9 July and close on 16 July, to ensure a new leader is in place before Parliament returns in September. The only candidate to put themselves forward so far is Andy Burnham, elected back to Parliament last week. He was backed by former Health Secretary Wes Streeting, who himself was expected to stand.
US and Iranian officials concluded a round of talks in Switzerland over the next stage of their peace deal. Qatari and Pakistani negotiators described “encouraging progress” made towards a lasting agreement. Iran’s foreign minister said there had been “major progress” in talks focused primarily on the Israel-Hezbollah conflict in Lebanon, the continuation of which caused Iran to warn on Saturday that it had closed the Strait of Hormuz again. In reality, the Strait has remained open, and Brent Crude has fallen further. The International Maritime Organisation said it had received safety guarantees to allow hundreds of stranded ships to leave the Persian Gulf through Hormuz, in co-operation with Iran, Oman, the US and other coastal states. Brent Crude traded yesterday below levels seen on 27 February, the day before the US-Iran conflict began. There is expected to a short-term surge in oil supply before a lull as Gulf production will take time to restart and the location of tankers in the ‘wrong place’ could result in some inconsistency in supply for a time. The Oxford Institute for Energy Studies said the oil market would likely see supply and demand close to equilibrium by October, if there are no setbacks in the peace process.
By the numbers
- The flash PMI data for June shows continued strength in the US, with manufacturing at a 49-month high of 55.7 and services climbing to 51.3, above expectations. Any reading above 50 indicates expansion. The UK composite weakened to a 14-month low of 49.4; a second month of contraction led lower by services. The eurozone composite climbed to 49.5, stronger than expected, albeit a third consecutive month of contraction. Manufacturing expanded for the fifth consecutive month, but services continued to contract, with Germany a notable drag.
Market movers
The UK government has announced there will be no new “major policies” or spending decisions made during the transition to a new Prime Minister. Politics, and UK assets are now in limbo, with a very muted market response among UK assets. Keir Starmer told a cabinet meeting on Tuesday that he wanted an “orderly transition of power” and he would give his full support to his successor. Civil service departments are now under instruction to follow the established procedure for a change of government, and this period will not see any new major policy decisions or spending commitments initiated. This does not apply to the Defence Investment Plan, which is still expected to be published ahead of the NATO summit on 7 July.
The lack of Labour MPs yet to put themselves forwards suggests this could yet be a ‘coronation’ rather than a leadership contest which would bring the schedule forwards and mean Burnham could be Prime Minister next month. Bringing some certainty sooner rather than later would be a positive.
The investment lens
- As we near the mid-point of the year, it seems an appropriate time to briefly reflect on the past six months and look forward to the second half of the year. Our positive outlook at the start of the year, based on a strengthening economic backdrop and improving corporate earnings has been tested by heightened geopolitical risks and uncertainty. However, the strength of market returns reflects the prevailing view that while geopolitical risks remain elevated, economies are proving resilient in the face of another energy price shock, and the strength of corporate earnings has driven many equity market indices to new record highs.
- Geopolitical risks related to the Middle East will continue to influence markets, and a key component of the outlook for the next six months remains the resolution of the closure of the Strait of Hormuz. Assuming the current situation prevails, and shipping volumes remain on a path to normality, then the economic scarring should be limited, though the impact on inflation remains a data point to watch closely, given this will have consequences for the path of interest rates as central banks decide how aggressively they need to respond, if at all, to another wave of inflation.
- Overall, our views remain constructive. We expect economic growth to stay positive, while earnings momentum appears strong and increasingly broad-based across sectors and regions. Narrow market leadership remains a risk, particularly given the extent to which the AI theme has driven gains in a relatively small group of companies, but the underlying profit picture is healthier than this suggests. Against that backdrop, we continue to see the most compelling return opportunities in equities over bonds, with a bias towards Asia and Japan. In summary, while interest rate uncertainty and geopolitical risks may bring further volatility, resilient growth and solid corporate fundamentals should remain the dominant forces shaping markets in the second half of 2026.
