Introduction: Bank of England Deputy Governor Warns of Stock Market Decline
Good morning, and welcome to our continuous coverage of business, financial markets, and the global economy.
Stock markets are currently overvalued and expected to decline eventually due to numerous risks facing the global economy, according to a senior official at the Bank of England.
Sarah Breeden, deputy governor of the Bank of England, shared this outlook with the BBC amid record highs in the US stock market despite ongoing conflict in the Middle East.
"There’s a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point."
This perspective aligns with other analysts who have highlighted risks from elevated AI valuations, AI-driven disruption, and vulnerabilities in the private credit market.
Breeden emphasized the concern that multiple risks could materialize simultaneously, such as an economic shock triggering a rapid reassessment of AI valuations and undermining confidence in private credit.
She clarified that she is not forecasting an immediate market correction but is focused on ensuring the UK financial system's resilience.
"What we are watching for: is how might those prices fall? Will there be a sharp adjustment downwards? And if there is such an adjustment, how will that affect the economy? I’m not saying it will happen today, tomorrow, in 12 months’ time. It’s ensuring that if it happens the system is resilient."
The Agenda
- 7am BST: UK retail sales report for March
- 9am BST: IFO survey of German business confidence
- 10.30am BST: Russia interest rate decision
Sarah Breeden’s caution that share prices do not fully reflect the risks facing the global economy may have contributed to market declines this morning, according to Russ Mould, investment director at AJ Bell.
"The stock market reflects what investors think will happen in the future. While markets have been wobbly since the Middle East conflict unfolded, they didn’t pull back sharply in the early stages of the crisis, and more recently they’ve shown resilience. That suggests investors are confident the war will end quickly, and elevated oil and gas prices will retreat as supply is restored.
Oil prices currently trade at $105 per barrel which is higher than the sub-$70 price seen at the start of 2026, but below the $120+ level when Russia invaded Ukraine in 2022. One could argue current oil prices are high enough to cause pain for businesses and consumers as everything becomes more expensive. There are already signs it is causing problems for companies as they report cautious outlook statements.
Central banks such as the Bank of England will be watching key data points around inflation and the jobs market to see if interest rates need to change. It’s a tough call as a swift resolution to the Middle East could mean that an inflation spike is only temporary, and that monetary policy may not need to go down a different path. But wait too long to respond and central banks could face criticism that once again they didn’t act fast enough.
It’s unusual for a Bank of England official to explicitly warn about a potential stock market pullback, and the comment might have contributed to some of the FTSE 100’s decline on Friday."
Iran Crisis Impacting German Economy as Business Confidence Weakens
German business sentiment has weakened this month as rising energy costs linked to the Iran conflict threaten to impede the country’s economic recovery.
The Ifo institute reported its business climate index dropped to 84.4 in April from 86.3 in March, marking the lowest level since May 2020, during the early phase of the Covid-19 pandemic.
The index measuring economic expectations fell to 83.3 in April from 85.9 in March, the lowest since August 2023.
"Companies are considerably more pessimistic about the coming months
The German economy is being hit hard by the Iran crisis."
– Clemens Fuest, president of the Ifo institute
Oil Prices Rise Amid Strait of Hormuz Blockades
Oil prices increased by nearly 1% this morning as both the US and Iran maintain blockades in the Strait of Hormuz.
Brent crude rose to $106 per barrel, approaching the two-week high of $107.40 reached yesterday.
Energy prices climbed following US President Donald Trump’s order for the US military to "shoot and kill" small Iranian boats deploying mines to obstruct traffic through the strait.
Expectations of an early resolution diminished after Trump responded "Don’t rush me" when questioned about the timeline for a long-term peace deal with Iran.
However, there was some relief as Trump announced a three-week extension of the ceasefire between Israel and Lebanon.
"It’s shaping up to be a frustrating Friday, with oil prices on the march higher yet again and companies and consumers left counting the cost of the conflict. In just a week, we’ve had a sharp reversal of hope, with the key strait of Hormuz firmly shut and President Trump issuing shoot-to-kill orders to the US Navy for any boats laying mines.
Brent crude is up around 20% on the week and is trading around the hot level of $105 a barrel, as any hopes of an immediate easing of the crisis are shattered. President Trump has stressed he’s in no rush to end the war, and with the ceasefire extended for another three weeks, there’s set to be fresh financial pain ahead as key shipments from the region remain blocked. That is set to keep costs elevated for a vast array of commodities, from oil and gas to fertiliser and helium, which are vital for electronics manufacturing."
– Susannah Streeter, chief investment strategist at Wealth Club
FTSE 100 Opens Lower Amid Middle East Tensions and Market Concerns
The London stock market opened lower as investors reacted to the lack of progress in resolving the Iran conflict and Sarah Breeden’s caution regarding stock valuations.
The FTSE 100 index declined by 48 points, or 0.46%, to 10,408 points.
Packaging company Mondi led losses with a 5.8% drop after warning that the Middle East conflict is increasing its costs.
Japan’s Nikkei Hits Record Closing High
Japan’s Nikkei 225 index closed the week at a new record high, buoyed by strong earnings reports from the technology sector that outweighed concerns about the Middle East conflict.
The Nikkei 225 reached 59,716.18 points, marking a 2.1% gain for the week.
Mondi Raises Prices Amid Rising Costs from Iran Conflict
Paper and packaging firm Mondi announced price increases to offset higher costs driven by the Iran conflict, amid ongoing challenging trading conditions that have led to factory closures and job cuts across Europe.
The company, headquartered in Weybridge, Surrey, reported plans to cut 450 jobs this year following earlier announcements to close three factories in Hungary, Poland, and Germany, according to .
These closures add to three recent shutdowns in Turkey, Hungary, and Germany as Mondi takes "targeted actions to strengthen our competitive advantage" and reduce costs.
Mondi, which operates globally including a facility in Birmingham, described trading conditions in the first quarter of 2026 as "challenging."
The FTSE 100-listed group is raising prices to counteract rising costs from the Middle East conflict and elevated oil and energy prices, stating to shareholders:
"Across the business, we have however experienced increased energy, raw material and logistics costs. We are actively responding with pricing actions.
While there is a customary lag, we expect the impact of these price increases to take full effect in the third quarter of this year."
Investor Notes Growing Cognitive Dissonance in Markets
Emma Moriarty, portfolio manager at CG Asset Management (CGAM), commented on the high stock market levels, suggesting markets are exhibiting "increasingly marked cognitive dissonance." She argues that share valuations do not adequately reflect the energy shock caused by the Iran conflict and are overly optimistic.
"The Strait of Hormuz has been shut for eight weeks. The last ships went through on the 28th February and are arriving at their destination now, implying that we have effectively reached the point where pre-closure supply is exhausted.
Commodity markets and government bond markets have repriced to reflect this. Oil and gas price curves continue to show tightness of supply in the spot and the next few months’ futures markets.
Government bond markets have priced in an inflation shock. In the UK, nominal interest rates have risen by around 50bp across the curve since pre-war levels.
OIS markets, which began the year pricing in 2-3 cuts to Bank Rate, now price in 1-2 Bank Rate rises, a reflection of stickier inflation expectations.
At the same time, short-term UK real interest rates have fallen, a function of increasing market expectations of inflation and lower growth over the coming years.
The impacts are also showing up in the real economy. Petrol and diesel prices are higher; industry bodies are warning of potential double-digit food inflation; the number of payrolled employees has fallen; demand destruction is beginning, with mass flight cancellations being one of the most visible examples.
By contrast, equity markets have continued their optimistic run: After a steep drawdown in the middle of March, the MSCI World Index is currently around 5% higher than it began the year – even after accounting for GBP appreciation over the period."
Motor Fuel Sales Boost UK Retail Sales in March
Retail sales in Great Britain increased in March, driven by motorists filling up amid rising petrol and diesel prices linked to the Iran conflict, according to the Office for National Statistics (ONS).
The ONS reported a 0.7% rise in retail sales volumes in March, reversing a 0.6% decline in February. Excluding automotive fuel, sales rose by a more modest 0.2% over the month.
For the January to March quarter, retail sales volumes increased by 1.6%.
ONS senior statistician Hannah Finselbach explained:
"Retail sales rose in the three months to March, with commercial art galleries doing well earlier in the quarter and sales in beauty products stores rising as retailers reported launching new collections. Online shops also saw strong sales across the period.
Motor fuel sales were up on the quarter, with retailers commenting that many motorists had been filling up their tanks in March following the start of conflict in the Middle East."
However, this is somewhat puzzling as recent public finance data showed fuel duty collected in March was the lowest since July 2023.
Trump Threatens UK with Tariffs Over Digital Services Tax
The prospect of a renewed UK-US trade dispute has emerged after former US President Donald Trump threatened to impose tariffs on the UK if it does not repeal its digital services tax on US social media companies.
Speaking to reporters from the Oval Office on Thursday, Trump stated:
"We’ve been looking at it and we can meet that very easily by just putting a big tariff on the UK, so they better be careful.
If they don’t drop the tax, we’ll probably put a big tariff on the UK."
The digital services tax, introduced in 2020, levies a 2% charge on revenues of several major US technology firms.
The Trump administration has opposed the tax; in December, the US paused a planned multibillion-pound investment in UK technology in protest against perceived trade barriers.
