UK markets advanced this week with the FTSE 100 Index gaining 1.75% to trade at 7,425 points at the time of writing.
The UK government borrowed almost £15 billion more than expected during the last fiscal year, increasing pressure on the Chancellor, Rachel Reeves to raise taxes in her Autumn Budget to balance the books.
The shortfall between government income and spending was £151.9 billion in the 12 months to March, according to the Office for National Statistics, an overshoot of more than 10% on the £137.3 billion forecast just a month ago by the Office for Budget Responsibility, the government’s fiscal watchdog. It was also £20.7 billion more than in the same 12 month period a year earlier and the third highest level of borrowing on record for a full fiscal year.
This raises the chances that if the Chancellor wishes to stick to her fiscal rules, more tax hikes in the autumn will be required. Reeves’ self-imposed rule is that day-to-day spending must be covered by revenues by 2029-30.
The International Monetary Fund has cut the UK’s growth forecasts from 1.6% to 1.1% this year, as it warned of widespread economic disruption from a US-driven surge in trade barriers around the world, and said that they now expect the Bank of England to lower interest rates three more times this year. A looming rise in inflation, which led the fund to increase expectations for UK price rises this year, is likely to be a temporary phenomenon that leaves room for rate reductions, it predicted.
Elsewhere, British retail sales unexpectedly rose by 0.4% in March, with sunny weather helping sales in clothing and outdoor shops. The monthly data from the Office for National Statistics showed that the volume of goods bought exceeded expectations of economists polled by Reuters, who had predicted a 0.4% contraction. The figure followed a 0.7% increase in February and a 1.4% rise in January. Separate figures published on Friday by research company GfK showed that consumer confidence fell four points to minus 23 this month, the lowest level for well over a year.
Commodity markets
In the commodity markets, Brent crude futures traded around $66 per barrel on Friday and are set to end the week little changed, with investors weighing a potential OPEC+ output increase against conflicting tariff signals from the White House and ongoing US-Iran nuclear talks.
Oil prices fell earlier in the week after Reuters reported that several OPEC+ members will suggest the group accelerates oil output increases for a second month in June. There had previously been disputes among the members over compliance with production quotas. Signs that the US and China could be moving closer to trade talks gave prices some support.
Potentially putting downward pressure on oil prices, the US and Iran will hold a third round of talks this weekend on a possible deal to reimpose restraints on Tehran’s uranium enrichment programme. The market is watching the talks for any sign that a US-Iran rapprochement could lead to the easing of sanctions on Iran oil and boost supply. However, the US on Tuesday put fresh sanctions on Iran’s energy sector, which Iran’s foreign ministry spokesperson said showed a “lack of goodwill and seriousness” over dialogue with Tehran.
Gold prices traded around $3,300 an ounce on Friday and are set for a slight decline this week, as signs of easing in global trade tensions lifted the US Dollar, dampening the demand for dollar-denominated commodities.
Equity markets
US equity futures rose on Friday as megacap technology stocks led the advance and investors weighed mixed signals from the Trump administration on tariffs and trade talks with China. In Thursday’s regular trading session, the Dow Jones Industrial Average gained 1.23%, the S&P 500 advanced 2.03%, whilst the Nasdaq Composite surged 2.74%.
Equities were supported this week by President Trump’s remarks that tariffs against China would not remain at 145% in the longer term. China is also reportedly considering waiving its 125% tariff on certain US goods, raising hopes of a de-escalation in the trade war. The Wall Street Journal reported that the White House would be willing to lower its tariffs on China to as low as 50% in order to open up negotiations. US Treasury Secretary Scott Bessent said on Wednesday that that current tariffs of 145% on Chinese products and 125% on US products were not sustainable and would have to come down before trade talks between the two sides. However, China told the US to “completely cancel all unilateral tariff measures” if Washington wants trade talks, raising doubt on a resolution. Trump has wanted to negotiate a deal with President Xi Jinping, but China has insisted it will not capitulate to what it views as economic bullying.
Trump has softened some of his overall tariffs, granting exemptions for smartphones, semiconductors and electronics. Speaking to reporters on Thursday, Trump said US and Chinese officials had met on Thursday, but declined to provide any details. Earlier in the week, the International Monetary Fund warned that the US is confronting an increased risk of recession, as Trump’s trade war pushes the global economy into a significant slowdown.
In its latest World Economic Outlook, the fund cut nearly 1% off its growth forecast for the US this year and downgraded its outlooks for all other G7 nations, as well as major economies including China, India, Brazil and South Africa. It also defended the Federal Reserve’s policy on interest rates after Trump complained that the US central bank has been slow to cut borrowing costs. There have been growing worries about central bank independence, with Trump ratcheting up his calls for lower rates in recent weeks and saying the end of Federal Reserve Chair Jerome Powell’s term “cannot come fast enough”. This has fuelled a selloff in Treasuries, that took the US 10-year Treasury yield above 4.4% this week, heading towards levels reached in the market turmoil earlier this month.
Elsewhere, the number of Americans filing new applications for unemployment benefits increased marginally by 6,000 last week to a seasonally adjusted 222,000, in line with economists’ expectations. This suggests the labour market remains resilient, despite darkening clouds over the economy caused by a chaotic trade policy.
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