The FTSE 100 closed lower on Friday, weighed down by rising gilt yields, domestic political uncertainty, and the postponement of planned US-Iran talks in Switzerland.
The index ended the session down 36.43 points, or 0.4%, closing at 10,363.27, capping a weekly decline of 1.0% for London’s blue-chip benchmark.
The FTSE 250 fell 129.99 points, or 0.6%, to close at 23,200.73, while the AIM All-Share dropped 0.5% to 795.83, though the latter still managed a weekly gain of 1.0%.
UK gilt yields climbed sharply after Andy Burnham won the Makerfield by-election, clearing the path for his widely expected leadership challenge against Prime Minister Sir Keir Starmer.
Sir Keir congratulated Burnham but reaffirmed his intention to contest any leadership challenge during a public appearance in London on Friday.
“If there is a contest then yes I will run, I will stand. I’ve said repeatedly, I’m not going to walk away from that,” he told reporters.
The yield on 10-year gilts rose to 4.84% at the close of London equity markets, up from 4.76% at the same point on Thursday.
Kathleen Brooks, research director at XTB, said: “Andy Burnham may have won a resounding election result in Makerfield last night, but he has hard work to persuade financial markets that he is the right man for the job to grow the UK economy and get debt back under control.”
Brooks also noted that the yield move was not entirely attributable to Burnham’s win, pointing to government borrowing figures that significantly exceeded forecasts for May.
According to the Office for National Statistics, public sector net borrowing excluding public sector banks totalled £23.3 billion in May, up 30% from £17.9 billion a year earlier.
That figure surpassed the Office for Budget Responsibility’s forecast of £17.7 billion by £5.6 billion, compounding concerns about the sustainability of UK public finances.
Brooks said the rise in gilt yields tells “us three things, one, it is not all because of Andy Burnham, two, you cannot borrow excessive amounts of money when growth is flat-lining, and three, Burnham faces extremely constrained circumstances if he does topple Starmer.”
JPMorgan analyst Allan Monks said there is a “high risk” that Burnham, should he become prime minister, would consider changing the fiscal rules despite appearing to rule this out in recent weeks.
“He would need to tread carefully given market pressure, but a change motivated to allow more growth-enhancing investment spending could work if communicated in the right way. This would receive some support from a range of economists and think tanks,” Monks said.
In brighter economic news, the ONS reported that UK retail sales volumes rose 1.2% in May from April, beating analyst expectations and offering some relief to the broader economic picture.
Oil prices edged higher after the postponement of US-Iran talks in Switzerland and renewed fighting between Israel and Hezbollah in Lebanon, with Brent crude for August delivery rising to 80.21 dollars a barrel from 77.04 dollars on Thursday.
The stronger crude price lifted BP (LON: BP) and Shell (LON: SHEL), which gained 2.8% and 1.1% respectively, making BP the biggest riser on the FTSE 100, up 13.7p at 503.8p.
Gold fell to 4,152.32 dollars an ounce from 4,230.61 dollars on Thursday, dragging down miners Fresnillo and Endeavour Mining by 4.7% and 3.3% respectively.
Admiral (LON: ADM) dropped 3.2% after RBC Capital Markets downgraded the Cardiff-based insurer to “sector perform” from “outperform,” with analyst Ben Cohen citing a “more conservative view of current volumes and margins, particularly in H1.”
On the FTSE 250, PPHE Hotel Group plunged 16% after suitor Fattal Hotels confirmed it would not make a takeover offer, following opposition from Euro Plaza Holdings, which owns 33% of the company, though PPHE said it had “received an indicative proposal from another interested party.”