Labouring on – are prospects gloomy or bright?

After 12 months in power, Labour has had some difficult times – not least in recent weeks. Rebellions by MPs have seen the government back down on winter fuel payments and, more damagingly, do a U-turn on welfare cuts. These decisions have significantly increased the prospect of steep tax rises in the Autumn Budget.

Last week Chancellor Rachel Reeves was visibly upset in the House of Commons. This led to rumours that she was going to be sacked or resign. In response, the pound fell in value and the cost of government borrowing soared in the form of rising gilt yields. However, once it was clear that Reeves would be staying as chancellor, markets reacted positively – bond prices quickly rose again while bond yields fell.

Greg Venizelos, SJP’s Fixed Income Strategist, says the speed of the market reaction seemed to be in response to the uncertainty caused by the chancellor’s distress.

“Markets were wondering who would come next as a chancellor and that uncertainty can be unsettling. Ultimately it comes down to feedback on what government is doing. The government has been given the message that it needs to follow prudent actions, as the markets are watching.”

Few would disagree that the chancellor has a difficult role to play. As well as a tough domestic backdrop, global volatility such as unexpected tariffs or economic slowdowns elsewhere can have a knock-on effect on the UK.

But in positive news, the UK economy is likely to have grown in the second quarter, despite economic pressures. The June purchasing managers’ index highlighted a rise from 50.1 in May to 52 in June. This indicates economic expansion.

And while higher taxes are likely to be on the horizon, the stability of having a consistent government can help to underpin the economy, and support the value of bonds to some degree.

Greg says: “On balance the factors may be pointing towards lower bond yields going forward. If the government brings in more taxes and there is an adverse impact on growth, then this could also push inflation lower. This would mean the Bank of England could have more room to cut rates, potentially bringing down the cost of government borrowing.”

And there are other reasons to be positive. Justin Onuekwusi, SJP’s Chief Investment Officer, says: “The first year of this government has brought stability for markets and investors, underpinned by a clear, pro-growth tone and a willingness to engage with business.”

But it is what comes next over the coming months that will really seal the verdict on Labour’s return to power for investors and businesses.

Adds Justin: “Regulatory clarity from a growth-oriented government is essential as it gives businesses and consumers confidence and encourages long-term investing. Leveraging regulation to support better investment decisions, particularly in the UK market, could unlock capital that fuels sustainable growth. However, markets also value fiscal credibility. Any move away from fiscal rules risks unsettling bond investors, especially at a time when global debt is rising and uncertainty is weighing on bond markets. Staying the course on fiscal discipline will help reinforce market confidence.

“Investors want predictability on regulation, on tax, and on the broader economic direction. Striking the right balance between reassurance and realism will be crucial. Recognising the role of the private sector in delivering growth will give the government more levers to pull. In a volatile global landscape, the UK has a real opportunity to lead by creating the certainty that investors and businesses need to plan and grow.”

Tariff uncertainty

Countries who have yet to agree a trade deal with the US may be sitting nervously right now. There are just two days left before the 90-day pause in US-imposed tariffs is due to end.

To date, the UK and Vietnam are the only countries to have signed a trade agreement with the US. Despite the difficult start to the relationship, China is reported to be close to a deal. Europe is not thought to be near.

Yet unsurprisingly there is confusion about what will happen and when. On Sunday President Trump announced letters would be sent out today to countries trading with the US, setting out the tariffs to be levied. He said countries would either receive a letter or have agreed a trade deal by Wednesday of this week. However, this was followed by Howard Lutnick, the US commerce secretary, saying that tariffs would not come into actual effect until 1st August.

Yet in another contradictory move, Trump this weekend threatened to levy an extra 10% tariff on any country that aligns itself with the BRICS group of nations (Brazil, Russia, India, China, South Africa plus others). This was on the grounds that BRICS are ‘anti-American’.

The International Monetary Fund has estimated that Trump’s tariff policies could shave 0.5% off global economic growth next year. In the near term, higher import costs could drive up inflation and squeeze US consumers. There would likely be an impact on growth and this would create a negative backdrop for US treasuries too.

The suggestion therefore that tariffs may not come into effect until 1st August could offer some relief to markets. It also potentially provides more time for trade deals to be agreed, or even for Trump to retreat from imposing some tariffs at all.

Despite the volatility, the S&P500 and NASDAQ equity indices reached new records for the second week in a row. The former delivered a weekly gain of +1.7% and the latter +1.6% in US dollar terms.

This followed publication of the latest US job figures, which showed 147,000 new jobs were added in June. This exceeded estimates by nearly 40,000.

Is the US economy like Teflon – immune to the external chaos? While US markets seem resilient, there is no doubt the uncertainty is adding to the nervousness of investors. And it seems likely to continue, says Justin.

“With the 90-day pause on reciprocal tariffs nearing its end, further volatility seems likely. While the UK has made progress on trade deals, the outlook for a comprehensive EU-US agreement remains uncertain. Meanwhile, negotiations with China remain complex and unresolved.

“Despite the headlines, the relationship between politics and equity markets is more nuanced than often portrayed. While political events can trigger short-term market movements, it’s valuations that tend to drive performance over the long term. In this environment, staying focused on long-term goals is key.”

For more information, get in touch with Liberty today.

SJP approved 07/07/2025

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