Footsie flat as oil stays elevated

Susannah Streeter, chief investment strategist at Wealth Club, said: “It’s been another lacklustre start for the Footsie as crude prices have stayed stubbornly above $100 a barrel, with no relief in sight.

“Hopes that there would be some kind of resolution before the US mid-terms, to offer relief at the pumps for voters, have been dashed, with President Trump warning the conflict won’t end before the elections.

“He’s trying to woo the electorate instead with helicopter money, offering $5,000 cheques if Republicans retain control of Congress, but this will be sugar-rush money, and while it may boost spending in the short term, it will only add to concerns about the profligate nature of his presidency.

“These concerns are showing up as warning lights in the bond markets, especially with Norway’s sovereign wealth fund proposing to cut its US Treasury holdings by potentially tens of billions of dollars. A decision by US Treasury Secretary Scott Bessent to ramp up bond buybacks landed like a damp squib.

“It signalled the administration is worried about yields, but the scale of the buyback suggests it isn’t prepared to throw serious financial firepower at the problem.

“Steamy energy prices appear to be the trigger for these latest moves higher in yields, but there’s been an underlying structural shift in the global flow of money for some time as some of the world’s biggest institutional investors rotate away from Treasuries to seek returns in corporate debt, with a huge stream issued by AI hyperscalers.

“Add in the prospect of higher defence spending as geopolitical tensions rise, and there is potentially an even bigger supply of bonds looking for buyers.

“And what happens in Treasuries doesn’t stay in Treasuries, with the pressure spilling over into other government debt, including gilts. Bond markets are closely connected, with investors constantly comparing the returns available from US Treasuries, UK gilts and other major sovereign debt.

“The European Central Bank meeting is in sharp focus today, with a hike in interest rates widely expected. Although the decision in itself is not set to be a market mover, President Christine Lagarde’s comments will be closely watched for the direction of travel ahead.

“While she’s stressed a future hiking path isn’t set in stone, with Eurozone inflation creeping higher and hotter energy prices building, speculation is building about future hikes ahead.

“There is specific UK pressure building as well, with investors looking ahead to the looming Budget, with government finances already under considerable pressure.

“Higher oil prices threaten to keep inflation elevated, while higher borrowing costs are already eating into the government’s fiscal headroom.

“The UK has already had to pay its highest yield on a 30-year gilt since the Debt Management Office was established in 1998, at 5.82 per cent, underlining just how sensitive the public finances have become to higher borrowing costs.

“But demand for the debt was still strong, with investors putting in orders worth more than £87 billion for the £4.25 billion being sold, showing that investors are still willing to buy UK government debt, but at a very high price.

“For households and businesses, the consequences eventually filter through in the form of more expensive mortgages, loans and corporate borrowing, potentially weighing on investment and growth, which is why there’s so much caution around on equity markets too.”