Daily market update: all eyes on Andy Burnham and his new cabinet, Ryanair

Investors are keenly awaiting details of who will form Andy Burnham’s cabinet once he becomes UK prime minister today.

Shabana Mahmood is the favourite to become chancellor and so far, bond markets seem to prefer her as the likely candidate rather than Ed Miliband. Gilt yields eased back last week on speculation that Mahmood would get the job, which is the biggest clue that markets are accepting the governmental change in a calm manner.

That’s good for now, but it’s what comes next that really matters. Bond investors are looking for any clues on public spending intentions, how they will be funded, and any policies that deviate from the path pursued under the Starmer-Reeves regime. Burnham’s big speech later today might offer a glimpse at what he wants to achieve but is unlikely to give the full picture.

Political change is a lot for investors to digest, but they’ve got more on their plate. The Iran war has escalated and driven oil prices back above $90 a barrel. That means inflation fears are back on the table, which has major implications for interest rate expectations. 

Rate hikes could come as soon as September, where the market is pricing in a 54% probability for hikes in the US and 60% for the UK. Stock markets typically don’t like rate hikes, and the prospect of higher borrowing costs could weigh on business and consumer sentiment. 

European markets were in the red in the face of Middle East tensions. The FTSE 100 fell 0.6%, with energy the only sector enjoying gains. The interest-rate sensitive real estate sector was the worst performer, with economically sensitive basic materials close behind. Essentially, it’s a repeat of the trends seen earlier this year when the Iran war unfolded.

Airlines once again face higher fuel costs, housebuilders are clouded by a potential hike in mortgage rates which could dampen demand, and consumer goods companies will have to work hard to convince shoppers to buy trusted brands instead of trading down to cheaper supermarket own-label products. It’s no wonder that shares in International Consolidated Airlines, Barratt Redrow and Unilever were weak.

Ryanair 

The latest update from Ryanair provided insight into airline sector stress thanks to the turbulence created by the Iran conflict. 

Even for those carriers whose routes are not directly impacted, the increase in fuel prices, the pressures on consumer confidence, and the diminished appetite for overseas travel are all major headwinds to navigate. Visibility is worse than San Francisco airport when the fog sets in, and in that context it’s not a surprise to see Ryanair opt against giving full-year guidance.  

Ryanair is better placed than many of its rivals. A good chunk of its fuel supply is hedged at much lower levels than the prevailing oil price and it has a robust balance sheet.

That may boost its competitive position in the medium term if peers on shakier foundations start to crumble and capacity comes out of the market. EasyJet succumbing to a bid from private equity might also be helpful if it results in a more conservative approach on its part.

However, the rapid increase in costs for the unhedged portion of Ryanair’s fuel supply and downward pressure on fares is impacting margins. Management admits their fare income is at the mercy of booking activity in August and September.  

The renewed escalation in hostilities in the Middle East is unhelpful and without a lasting resolution, challenging times for the airline and travel space look set to continue.