UK markets continued their positive momentum this week with the FTSE 100 Index rising by 0.6% to trade at 8,300 points at the time of writing. UK 10-year borrowing costs rose to the highest level since the global financial crisis and Sterling sank this week as an intensifying bond sell-off threatened the Labour government’s ability to meet its self-imposed budget rules.
The 10-year gilt climbed above 4.84% on Friday, but was still below the 4.93% touched on Thursday, its highest level since 2008, while the yield on 30-year gilts climbed to 5.47%, its highest level since 1998. Yields move inversely to prices. Sterling edged lower against the Dollar, falling 0.2% to $1.224, supporting the FTSE 100 Index which derives roughly three quarters of its income from overseas.
UK borrowing costs have risen much faster in the UK so far in 2025 than in other big economies as investors worry about the government’s heavy borrowing needs and the growing threat of stagflation.
In late October, Chancellor of the Exchequer, Rachel Reeves unveiled a new budget that included £142 billion in borrowing and a £74 billion increase in annual spending, raising alarms about fiscal sustainability. The Treasury sought to reassure markets by stressing the government’s commitment to its fiscal rules and ensuring stable public finances.
The bond sell off has been global but is being compounded in the UK by the toxic combination of a flat-lining economy, sticky inflation and a worsening fiscal outlook. Some 700,000 British households now face a jump in mortgage costs when their fixed-rate deals end in 2025, as the sell-off in the UK government debt markets could keep borrowing costs higher for longer.
Commodity markets
In the commodity markets, Brent crude futures traded around $80 per barrel on Friday and are set for a weekly rise, as investors factored in firm winter fuel demand despite large US fuel inventories and macroeconomic concerns. Analysts at JP Morgan expect oil demand for January to expand by 1.4 million barrels per day year on year to 101.4 million barrels per day, primarily driven by increased use of heating fuels in the Northern Hemisphere.
The US weather bureau expects central and eastern parts of the country to experience below average temperatures. Many regions in Europe have also been hit by extreme cold and will likely experience a colder than usual start to the year, boosting fuel demand. An earlier onset of travel activities in China for the Lunar New Year Holidays is also set to boost oil consumption. Moreover, the market structure in Brent futures is indicating that investors are becoming more concerned about supply tightening at the same time demand is increasing.
US President Joe Biden is expected to announce new sanctions targeting Russia’s economy this week. The move is part of efforts to bolster Ukraine’s war effort against Russia before President-elect, Donald Trump takes office on January 20th. A key target of sanctions so far has been Russia’s oil industry.
Gold prices traded around $2,680 an ounce on Friday and are set for a weekly rise, supported by safe haven demand.
Equity
US equity futures fell on Friday after the US market was closed on Thursday for a national day of mourning on behalf of former president Jimmy Carter, who died in December. In Wednesday’s regular trading session, the Dow Jones Industrial Average rose by 0.25%, the S&P 500 gained 0.15%, whilst the Nasdaq Composite slipped by 0.06%.
In minutes from the Federal Reserve’s December meeting released on Wednesday, officials noted the elevated policy uncertainty as Donald Trump’s second presidency is set to begin and indicated that the pace of rate cuts could start to slow or even pause. Federal Reserve officials’ caution about future rate cuts is driven by a wariness about the US inflation outlook, given concern among economists that Trump’s plan for tariffs, tax cuts and immigration could speed up price rises again.
According to the minutes, officials believed the “likelihood that elevated inflation could be more persistent had increased” and was a central risk to the outlook. However, some officials have signalled they still expect US monetary policy to be loosened fairly aggressively, and dismissed the concerns about the impact of tariffs.
The Institute for Supply Management’s non-manufacturing purchasing managers’ index, a gauge of activity in America’s extensive services sector, climbed to 54.1 in December, higher than economists’ expectations of 53.3. A reading above 50 signals expansion. The US economy added 256,000 jobs in December, well above expectations, sending yields on long-term US government debt jumping to the highest level since 2023 and knocking equities.
The figure from the Bureau of Labor Statistics released on Friday exceeded expectations of economists polled by Reuters of 160,000, and was above the downwardly revised figure of 212,000 positions added in November. Friday’s report also showed the unemployment rate surprisingly dropped to 4.1% from 4.2%, while wage growth slowed to 0.3% as expected. Investors are now expecting the Federal Reserve to leave interest rates unchanged until the second half of the year.
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