"Sorrows they come not in single spies but in battalions." Keir Starmer might nod along to that line from Hamlet this weekend. Every single one of the difficulties for the government is converging in the fall out from the Iran war.
A consequence of this energy shock is that inflation will rise. A month ago everyone was debating when the Bank of England would cut rates. Now traders are pricing in multiple rate rises this year and whereas at the start of this re-evaluation, wise observers thought they were being overly skittish, now even cool-headed analysts wonder if they may be right.
The UK already had high energy costs in peacetime, now in war time the screw is tightening. The government had worked hard to build back up a fiscal buffer but that is being squeezed not only by higher borrowing costs -- today 10 year gilts reached their highest level since the start of the financial crisis in 2008 -- but by demands to support the poorest with their energy bills. This afternoon, Cornwall Insights forecast a 20% surge in the energy price cap over the summer. Morwenna Coniam has a must-read analysis below on the day in bonds.
One of Starmer's cabinet ministers came out yesterday to urge her government to relax their fiscal rules to enable more borrowing -- something that would-be leadership contender Angela Rayner recently reassured investors a Labour government would not do. This talk of relaxing the fiscal rules is one of the elements making the markets so anxious today.
Lastly, as we've written so many times -- these demands on the public purse come on top of the need for more defence spending.
All in, I suspect the PM will welcome the distraction of his beloved Arsenal playing in a Wembley final. But I also wonder if the scale of this crisis could actually protect Keir Starmer even if May's elections are bad -- "it's no time for a novice" and all.
The excellent guide here sets out the sheer supernova of consequences already flowing around the globe from the strikes this week on Qatar's LNG "crown jewel." It will, our team write, reshape the future of gas and the damage will take 5 years to repair:
"Each week the world's largest liquified natural gas plant remains shut, the world loses the equivalent of enough energy to power Sydney's homes for an entire year. Buyers are now bracing for an outage that could ripple through markets for years."
In Europe, and in the UK, the debate is now focusing in on how to "decouple" gas from setting the price of energy. Yesterday a report by think tank, Common Wealth, proposed what's being called a "single buyer model" whereby low carbon generators like renewables and nuclear would be taken out of the wholesale market and paid fixed prices while gas plants would be moved from the market to a "strategic reserve" to be used when renewables and nuclear are not available.
This idea of a "strategic reserve" is something proposed by the consultancy Stonehaven last year and was included in this magisterial consideration of the thorny issue by the invaluable Carbon Brief website. As Adam Bell, a former head of Whitehall energy policy, tells them it would be possible to implement within 18 months "but only if moving at a pace that the civil service might describe as 'brave.'" This debate is going to run and run.
Have a decent weekend all.
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Markets Today: Milestones
Hi, it's Morwenna Coniam from the Markets Today blog. It's hard to know which ghoulish milestone to start with, or which won't have changed by the end of the day, but I'll take a chance that 2022 and 2008 will still be relevant.
Broadly speaking, UK borrowing costs have today risen to their highest since 2008, with the yield on the 10-year benchmark gilt reaching 5% for the first time since that year, when markets were plagued with the onset of the financial crisis.
Shorter dated gilts meanwhile have been pummeled by rapidly mounting expectations that the Bank of England will hike interest rates as many as FOUR times this year. Yes FOUR. That would take rates back up to 4.75%, just a couple of notches down from their 2023-2024 peak before the central bank began its long-awaited easing cycle.
I know the BOE sounded a more hawkish tone yesterday, but fully pricing in three cuts, with a 68% chance of a fourth seen is really quite dramatic.
Reflecting that, two year gilt yields have shot up again, with a 20 basis point rise at the time of writing compounding the 40 basis point climb following the BOE decision yesterday. It's set to be the worst week for two-year gilts since Liz Truss's Mini Budget in September 2022.
It all comes down to rising energy prices and inflation fears, but the beating gilts are taking outstrips those elsewhere. Even if a relatively high level of imported energy dependence merits a more adverse reaction, the degree of battery points to the underlying fragility that still haunts the gilt market, just as a semblance of calm seemed to have taken hold.
It's bad news for the government, whose borrowing costs will now be sucking up the Treasury's fiscal headroom (public finances for the happier month of February this morning, suggest things weren't all that great even before the war in Iran) and it's bad news for anyone in debt or looking to borrow money. Swaps used to price two-year mortgages are now back to their highest since interest rates were at their 2024 peak. Expect more challenging times to follow.
The big number
5%
The yield on the UK's 10 year gilt -- the first time since it's crossed that level since the start of the financial crisis in 2008.
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With a fifth of global oil paralyzed, a chaotic campaign against Tehran leaves the White House scrambling to shield the US economy.
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Allegra Stratton worked for former Prime Minister Rishi Sunak when he was chancellor and runs an environmental consultancy, Zeroism.
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