A new chapter for UK-EU relations

Market update

Global equity markets experienced broad-based declines over the week - global equities declined by -3.2%, with US equities leading the downturn (-4.5% in GBP terms) amid heightened geopolitical and fiscal uncertainty. Year-to-date returns slid back into negative territory at -0.8%. The sell-off was triggered by a weaker-than-expected 20-year treasury bond auction on Wednesday, and was exacerbated by trade tensions after President Trump announced a sweeping 50% tariff on European Union imports, as well as threatening a 25% tariff on iPhones unless Apple shifts production to the US, which led to tech stocks falling. European equities also retreated by -0.6%, predominantly due to French and Italian equities, reflecting investor worries over retaliatory trade measures and weakening economic indicators. In contrast, UK equities saw a +0.4% gain, on the back of strong retail sales and improved consumer confidence. EM equities declined by -1.8% in GBP terms, mostly due to currency movements and lingering uncertainty despite a temporary trade truce with the US and China.

In the fixed income space, volatility in the long-term US Treasury market was a central theme, with yields spiking midweek after a disappointing 20-year bond auction. The 30-year yield reached its highest level since 2023, driven by concerns over U.S. fiscal health and the implications of new tax legislation. Although yields moderated slightly by the end of the week, the overall damage to investor sentiment was done, and US 10-year treasury bond yields finished at +7 basis points higher (bond prices and yields move in opposite directions). In Europe, bond markets responded to weaker-than-expected PMI data and a downward revision in the European Commission’s growth forecast. German economic data surprised to the upside, with Q1 growth revised sharply higher, helping to stabilise bund yields, ending the week with a change of -2 basis points.

Gold performed well amid the heightened uncertainty, rising by 4.8% in US dollar terms (2.8% in GBP), whereas oil prices fell by -3.4%.

Macro news

This week, the UK and EU announced a landmark deal to reset post-Brexit relations during a summit in London. The agreement, described as a "new chapter" by both UK Prime Minister Keir Starmer and European Commission President Ursula von der Leyen, focuses on trade, defence, fishing, and mobility, aiming to reduce tensions and boost cooperation. Among the key points we find:

• A new Sanitary and Phytosanitary (SPS) agreement reduces red tape for UK food and drink exports, eliminating most routine border checks on animal and plant products.
• Linking the UK and EU Emissions Trading Systems (ETS) avoids an EU carbon tax, saving UK businesses £800 million annually and protecting steel exports from new EU tariffs, saving £25 million per year.
• Defence and Security- a formal UK-EU defence and security pact was established, with biannual meetings to discuss foreign policy and sanctions. Cooperation will address illegal migration, including channel crossings, and enhance coordination on global issues like supporting Ukraine and countering Russia.

Consumer prices rose to 3.5% year-on-year, up from 2.6% in March, marking the highest rate in 15 months. This exceeded analyst expectations of 3.3%. Core CPI (excluding food and energy) increased to 3.8% from 3.4%, and services inflation jumped to 5.4% from 4.7%. Significant price rises in household bills drove the increase, with upward pressure from utility price hikes and tax rises. Concerns about US fiscal policy: This week, the House Budget Committee advanced the "One Big Beautiful Bill Act" (OBBBA). The bill aims to implement President Donald Trump’s fiscal priorities, including tax cuts, spending reductions, and increased funding for defence and border security. The Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog group, estimates that the House bill is shaping up to add roughly USD 3.3 trillion to the debt over the next decade. After the announcement, Moody’s downgraded the US credit rating from Aaa to Aa1, impacting bond prices and raising Treasury yields.