Global oil inventories falling at record pace, IEA warns
Global oil stocks are being depleted at an unprecedented rate as supply disruptions intensify due to the ongoing conflict in Iran, according to the International Energy Agency (IEA).
In its latest outlook report, the IEA states that global oil inventories declined by 129 million barrels in March and a further 117 million barrels in April, as nations tapped into reserves to compensate for supply shortfalls caused by the Middle East conflict.
The IEA, which initiated the largest release of government oil reserves in its history in mid-March, reports:
"More than ten weeks after the war in the Middle East began, mounting supply losses from the Strait of Hormuz are depleting global oil inventories at a record pace."
The agency also projects weaker demand for oil this year, attributing this to the surge in crude oil and refined product prices leading to demand destruction.
World oil demand is forecasted to contract by 420,000 barrels per day (bpd) this year, reaching 104 million bpd, which is 1.3 million bpd less than previously expected before the Iran war commenced.
"The petrochemical and aviation sectors are currently most affected, but higher prices, a weaker economic environment and demand-saving measures will increasingly impact fuel use."
UK bond recovery fizzles out on report Streeting ‘preparing to resign’
UK government bond yields halted their decline following reports that Health Secretary Wes Streeting is preparing to resign.
Streeting has reportedly informed allies that he is ready to resign and initiate a leadership contest as early as tomorrow.
The prospect of a challenge to Labour leader Keir Starmer has erased the modest recovery in UK short and long-term borrowing costs observed earlier.
Yields on two, five, ten, and thirty-year bonds are now largely unchanged, returning to levels seen last night after political uncertainty caused borrowing costs to surge.
Economist: high risk of "another Liz Truss moment" from change in UK leadership
Some of the initial recovery in UK bonds this morning is reversing.
Ten-year and thirty-year bond yields remain slightly lower today compared to last night, both down by approximately 2 basis points (0.02 percentage points).
Reto Cueni, Chief Economist at asset manager Syz Group, notes investor concerns that a Labour leadership contest could weaken fiscal consolidation commitments, increase public spending, introduce more interventionist labor-market policies, and raise taxes on businesses.
Cueni warns that bond markets would "quickly punish any abandonment of fiscal consolidation," emphasizing that political developments now influence funding costs more rapidly than before, referencing the 2022 Liz Truss mini-budget crisis when bond yields surged and the pound depreciated.
He further states there is a significant risk of "another Liz Truss moment" if UK political leadership changes or current leaders pursue substantially more fiscal loosening.
"Ultimately, the bond market may once again be the main constraint on UK fiscal policy. Much like during the Truss episode, gilts are acting as the transmission mechanism through which political uncertainty is disciplined. The message from rates markets is increasingly clear: bond investors are not willing to finance UK government debt easily when fiscal credibility is threatened, especially in an environment already prone to inflationary pressures."
UK wheat farmer faces losses after series of tricky harvests and Iran war
The average UK wheat farmer could face losses of £70,000 on their 2027 crop due to soaring costs linked to the Iran war, which has caused supply shortages from the Gulf, according to analysis by the Central Association for Agricultural Valuers (CAAV).
As farmers make decisions about 2027 cropping, the economic outlook suggests difficult choices, including potentially leaving fields fallow.
Jeremy Moody, CAAV Secretary, described the Gulf crisis as the "fifth hammer blow to arable economics after the last three problematic harvests and the present one," warning that the combination of strained cash flow and credit risks a significant reduction in cereal planting this autumn.
His analysis indicates that losses from crops now outweigh any additional income farmers might receive from environmental schemes or diversification.
"Many will be in a worse position than that; some will be better. The overall position points to discussion of what areas might not be planted this autumn rather than voluntarily spending money to incur that loss. It would be natural for these issues to be sharpest for those areas that made disproportionate use of set-aside above the minimum required levels."
Moody also highlighted challenges including fertilizer and energy cost increases, extreme weather events like drought and flooding, uncertainty over the government's EU reset with fears of produce bans, and the proposed Carbon Border Adjustment Mechanism expected to increase imported fertilizer costs.
Morgan Stanley: Middle East conflict wipes out £11bn of Reeves's budget headroom
Analysts estimate that Chancellor Rache Reeves’s fiscal headroom to adhere to her budget rules has decreased by at least £11 billion due to the Iran war.
In their Mid-Year UK Outlook released this morning, Morgan Stanley economist Bruna Skarica states:
"The hit to headroom from the likely Middle East events-related forecast revision looks to be £11 billion, albeit debt servicing costs pose an upside risk."
This aligns with Goldman Sachs’s forecast that higher gilt yields and slower growth could reduce the government’s fiscal headroom by approximately £12 billion.
At her last budget, the Chancellor had doubled her fiscal buffer to £22 billion.
The surge in energy prices since the Iran conflict began is driving inflation higher, which increases borrowing costs as governments issue debt to bond investors.
This also exacerbates the cost of living crisis, reducing household spending power and negatively impacting economic growth.
"In any case, political choices remain the key risk for 2027, where we think the skew is towards a wider deficit than our already above-OBR forecast. As noted, we do, ultimately, see limited scope for additional borrowing given market constraints. More broadly, high debt servicing costs likely reflect what the BoE and the Gilt market see as limited spare capacity to absorb additional material fiscal demand.
This perceived resource constraint remains the key barrier to meaningfully expansionary fiscal policy in the near term. Policy recalibration is possible, but the market wants it to happen in a fiscally neutral way."
The UK stock market opened higher amid improved sentiment in the City.
The FTSE 100 index rose 66 points, or 0.65%, to 10,331 points, with mining stocks gaining following a rise in copper prices this week.
The domestically focused FTSE 250 index increased by 0.4%.
Despite yesterday’s rise in UK bond yields, the cost of two-year fixed-rate mortgages slightly declined.
Data from Moneyfacts shows:
- The average two-year fixed residential mortgage rate is 5.74%, down from 5.75% yesterday.
- The average five-year fixed residential mortgage rate remains unchanged at 5.67%.
Research director Kathleen Brooks at XTB reports that UK bonds are attempting a recovery as Sir Keir Starmer remains in position for now:
"All eyes are on the UK bond market this morning, and so far, Gilts are stabilizing. The 10-year yield is lower by 4bps, as no clear challenger to the Prime Minister’s throne has emerged. Today is the King’s Speech in Parliament, which opens Parliament and sets out the government’s legislative agenda. Reports suggest that King Charles had to ask number 10 if this was taking place today, after yesterday’s turmoil.
So close to the opening of parliament was always going to be a tough time for a coup, and at least for now, Starmer’s position looks safe, albeit highly uncomfortable. UK bonds are staging a tentative recovery on the back of this, and yields are falling, other UK asset classes like the pound and UK stocks are stabilizing."
However, 10-year yields remain above 5%, indicating rising UK government borrowing costs that erode fiscal headroom.
Goldman Sachs also estimate a £12 billion shortfall in Chancellor Reeves’s budget plans due to rising borrowing costs and a forecasted slowdown in growth.
Goldman’s James Moberly and team state:
"We estimate that higher gilt yields and lower growth might reduce the government’s fiscal headroom by around £12bn (0.3% of GDP)."
"Much of that is due to the Iran war, and the resulting energy shock which has pushed up the borrowing costs of many governments, not the jump in borrowing costs yesterday (which is now partly unwinding this morning)."
Goldman Sachs: Bank of England unlikely to raise interest rates if new Labour PM boosted spending
Goldman Sachs argues that a change in Labour leadership accompanied by increased government spending is unlikely to prompt the Bank of England (BoE) to raise interest rates.
In a research note, Goldman Sachs economist James Moberly explains:
"We see no immediate implications from higher political risk for the BoE. It is possible, of course, that more expansionary fiscal policy under a new Labour leadership boosts demand and inflation, and therefore eventually requires tighter monetary policy.
But our previous analysis does not support the idea that the MPC has historically responded to signs of political risk by raising Bank Rate, for example, in an effort to support the currency.
That suggests that Andy Burnham, for example, could push for higher spending without the risk that the Bank responded swiftly by hiking interest rates."
Burnham has suggested considering defense spending outside existing fiscal rules, potentially allowing more borrowing.
Goldman Sachs notes that any prime minister’s policy options will remain constrained by rising spending pressures and an already high tax burden.
Moberly adds that most of the recent selloff in UK government bonds since the Iran war began reflects investor repricing of UK interest rate outlook rather than political risks.
He expects the BoE to keep interest rates steady this year but acknowledges that sustained energy price pressures could lead to rate hikes this summer.
UK bond yields fall after Streeting challenge to Starmer fails to materialise
UK government bond prices rallied at the start of trading, reducing borrowing costs.
Investors appeared relieved as Sir Keir Starmer retained leadership following the failure of a challenge from Health Secretary Wes Streeting.
The yield on 30-year UK government bonds dropped by 4.4 basis points to 5.72% in early trading, after reaching a 28-year high of 5.81% yesterday.
Benchmark 10-year bond yields also fell by 4 basis points to 5.06%, remaining above 5%.
Though these are modest changes, they signal a calming of the bond market for Downing Street.
As reported last night:
"Streeting was due to hold talks with Starmer on Wednesday, at which he was expected to talk candidly about his concerns, with No 10 insiders suggesting he was climbing down from intense speculation that he was on the brink of running."
Lloyd Harris, Head of Fixed Income at Premier Miton Investors, interprets the "Starmer drama" as highlighting government credibility issues.
"The Labour Party is not driven by one individual. It is shaped by its internal dynamics and by its union base, both of which tend to favour a more expansive fiscal stance. Markets understand this. They do not price the best-case scenario, they price the probability weighted outcome. Where fiscal discipline risks giving way to political pressure, yields adjust accordingly.
The reaction to Andy Burnham’s comments was telling. His remark that the UK has to “get beyond this thing of being in hock to the bond markets” reflects a strand of thinking within the party that markets instinctively reject, not the rhetoric itself, but for what it implies about relaxing fiscal constraints.
Bond markets do not need to be challenged; they need to be convinced. When policy signals suggest those constraints may be ignored, investors respond through pricing. Often labelled as bond vigilantes, but in reality, it is a straightforward repricing of risk."
Is the UK the harbinger of things to come?
This question is posed in a note from City firm TS Lombard, which highlights that the UK has experienced the downsides of a new macroeconomic supercycle characterized by a multipolar global order, increased conflicts, and more interventionist national policies.
The firm notes:
- The UK has experienced all the negative aspects of this new macro regime without the benefits.
- There is little expectation of the UK gaining these benefits soon.
- Political volatility is expected to continue in the coming months.
- Concerns about a budget blowout may be overstated.
- The UK is closest to recession if the Middle East shock persists.
Former hedge fund manager Rich McDonald warned that a prolonged process to replace Keir Starmer as Prime Minister would negatively impact markets.
Speaking on LBC’s Tonight with Andrew Marr, McDonald said:
"If we saw, let’s say Andy Burnham decided to run and there was some talk of a move to the left and more spending, I don’t think that would be taken well. And therefore, the bond market would give out a warning, right? If we see yields go anywhere near 6%, that that’s going to really scare people and it’s going to put up the cost of spending that we already have on our large debt position."
"We saw the long gilts rise to the highest yields that we’ve seen in almost 30 years, and they have a very strong message for Labour. Get your house in order."
Introduction: Bond market on edge after Tuesday's wobbles
Good morning, and welcome to our ongoing coverage of business, financial markets, and the global economy.
The UK bond market remains unsettled this morning after political turmoil on Tuesday pushed borrowing costs higher.
Fears of a Labour leadership change triggered investor anxiety and warnings of further bond market instability.
However, Keir Starmer remains in position, having resisted pressure to announce a departure timetable, with Health Secretary Wes Streeting not yet launching a leadership challenge.
Many investors caution that a leftward shift in Labour could provoke bond market resistance to increased borrowing and spending.
Additionally, the possibility of Reform winning the next election and Nigel Farage entering Downing Street appears to contribute to rising yields.
Senior analyst Ipek Ozkardeskaya of Swissquote explains:
"Brits are grappling with their own political shakeups after Nigel Farage scored big in the latest elections. The name Farage resonates in markets as a clearer path toward looser fiscal policy, higher spending and larger deficits, just as investors are already worried about Britain’s debt and inflation outlook.
That combination is pushing investors to demand higher compensation to hold UK government debt, sending the UK 10-year gilt yield back above 5%. That’s the highest level since 1998. The higher the borrowing costs, the less the government can borrow, and the impact on growth would be negative."
Yesterday’s sharp bond market moves were clearly triggered by the Labour government crisis, with speculation about Greater Manchester Mayor Andy Burnham as a potential leader.
However, market strategist Bill Blain of Wind Shift Capital recently argued that Reform may not be perceived as a "safe pair of hands," stating:
"Who in Reform is going to run the bond market / spending plan optimisation game? What are they going to do to solve the housing crisis – which isn’t about building 1.5 million executive homes in the next 3 years but about supplying decent social and affordable housing for young people to have housing security and start family formation? Who in Reform will be looking at the welfare budget (which now pays £39 billion (two-thirds of the defence budget) on housing benefits? Who in Reform will be making the calls on the NHS, Defence and, yes, the greatest immediate challenge to England since the Armada hove into view – filling potholes?
Reform has clear intent to govern. Over the next three years – how will they persuade the bond market they can?"
The UK government will present its legislative agenda today in the King’s Speech, potentially providing Starmer some relief from ministerial resignations and calls for his departure.
Key upcoming events include:
- 9am BST: IEA monthly oil market report
- 10am BST: Eurozone GDP report (latest estimate for Q1 2026)
- 1:30pm BST: US producer prices inflation report for April
- 3pm BST: Bank of England policymaker Catherine L Mann speech on ‘The UK’s international exposures and vulnerabilities’
