Iran – Open for de-escalation
Last week’s developments in the Middle East reinforced the market’s optimistic stance and added further fuel to the rally, as Iran and the US were reported to be moving closer to a one-page memo aimed at ending the war. Iran’s Revolutionary Guards Navy announced that transit through the Strait of Hormuz would be possible, although traffic remained low and broadly in line with previous weeks. At the same time, missiles were launched from Iran towards the UAE during the week, and on Thursday the US reportedly bombed locations linked to attacks on ships. Still, the messaging was enough to push markets higher, with oil falling back below $100 per barrel. The situation remains far from clear. Contrasting headlines on Hormuz suggest there may still be divisions within Iran’s leadership. However, the direction of travel now points more clearly towards a resolution, especially with the Trump-Xi meeting taking place this week.
US – Goldilocks
Last Friday, non-farm payrolls printed strongly at 115k, led by private payrolls, suggesting that the US economy remains far from slowing. The unemployment rate remained stable at 4.3%, in line with recent months, while average hourly earnings came in below expectations. This combination supports the “Goldilocks” narrative for the US economy: resilient growth, stable labour markets, and limited wage inflation. Risk assets continued to rally, helped by increasingly constructive headlines from the Middle East , with the S&P 500 extending its weekly winning streak and financial conditions now looser than before the Iran war. The absence of wage-driven inflationary pressure will likely be used by the doves on the Fed board, while the stability of unemployment gives the hawks a counterargument. For now, the Fed is priced for a prolonged hold, with the 2s5s Treasury curve broadly flat. However, any renewed price pressure could trigger an upward move in yields, scare markets, and force other central banks to rethink their forward rate paths.
UK – Starm-End?
Last week, the long-awaited UK local elections took place, and the outcome was broadly in line with expectations: a very poor result for Labour. On the other side, Farage’s Reform UK emerged as the clear winner, gaining close to 1,500 council seats and strengthening its position ahead of the next general election. The key question for markets was whether the result would be severe enough to trigger a challenge to Labour’s leadership, potentially opening the door to a shift further left. The outcome, while bad, was largely expected and does not appear sufficient to provoke a leadership challenge, with Sir Keir Starmer making clear that he is “not walking away.”
If a leadership contest were eventually to emerge, and a more left-leaning Labour figure were to replace Starmer, market concerns would likely focus on fiscal discipline. In particular, investors would question whether the fiscal rules would still be respected, with risks of higher borrowing and weaker fiscal credibility rising. More broadly, UK politics appears to be entering a new phase, with fragmentation becoming increasingly visible and both Labour and the Conservatives facing a more credible challenge from Reform. Market reaction was contained. Gilts and sterling found some relief on Friday, as a significant risk premium had already been priced in.
Algebris Investments’ Global Credit Team
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