Introduction: Stock markets are too high and set to fall, says Bank of England deputy
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Stock markets are too high, and are going to drop back at some point due to the many risks facing the global economy, one of Britain’s top central bankers has warned.
Bank of England deputy governor Sarah Breeden has issued the prediction to the BBC, at a time when the US stock market has risen to record levels despite the Middle East conflict.
She points out:
There’s a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point.
This chimes with the latest assessment from the Bank’s financial policy committee, which pointed to the risks from high AI valuations, AI disruption, and the private credit market.
As she explains, the big fear is that several risks crystallise at the same time – such as an economic shock that leads to a rapid readjustment of AI valuations, and hurts confidence in private credit.
Breeden is clear that she’s not predicting a correction imminently … but is focused on making the UK financial system strong enough to cope.
What we are watching for: is how might those prices fall? Will there be a sharp adjustment downwards? And if there is such an adjustment, how will that affect the economy?
I’m not saying it will happen today, tomorrow, in 12 months’ time. It’s ensuring that if it happens the system is resilient.
The agenda
-
7am BST: UK retail sales report for March
-
9am BST: IFO survey of German business confidence
-
10.30am BST: Russia interest rate decision
Key events
European markets head for first weekly loss since late March
European stock markets are on track for their first weekly loss in over one month.
The pan-European Stoxx 600 index has dropped by almost 2.8% so far this week. That would be its first weekly decline since 16-20 March, after four weeks of gains.
Today, the Stoxx 600 is down around 0.9%, with Germany’s Dax losing 0.5% and France’s CAC 40 down 1.2%. In London, the FTSE 100 is now down 66 points or -0.64%.
Markets are entering the final day of the trading week in a cautious mood, says Jim Reid of Deutsche Bank:
US-Iran tensions show no signs of easing while the Strait of Hormuz remains essentially closed.
Ahead of the weekend, there have been no signs of further talks, with Trump saying the “I don’t want to rush myself” when it comes to making a deal, while also claiming that “whatever I’m doing, it seems to be working very well”. Meanwhile, we saw Iran’s President, Foreign Minister and Parliamentary Speaker share similar messages of regime “unity” in short succession last night, after Trump posts claimed “infighting” between “Hardliners” and “Moderates” in Iran.
The rhetoric had also leant in an escalatory direction earlier yesterday, with Trump posting that he’d ordered the US Navy to shoot boats placing mines in the Strait of Hormuz. So all that has left lingering uncertainty, even as Israel and Lebanon have agreed overnight to extend their ceasefire by three weeks according to the White House.
Hapag-Lloyd says one ship has crossed Strait of Hormuz
Container shipping group Hapag–Lloyd has reported that one of its ships has crossed the Strait of Hormuz but did not have any information on the circumstances or timing, Reuters reports.
That leaves four Hapag ships in the Gulf, which the company says are staffed with 100 crew, who are well-supplied with food and water.
Goldman: Gulf oil supply is 57% below pre-war levels
Gulf crude oil production has more than halved since the Iran war began, a new report from Goldman Sachs shows.
Goldman have calculated that oil production has fallen by 14.5 million barrels per day, or 57%, from pre-war levels, due to the closure of the strait of Hormuz and attacks on energy production facilities in the region.
The Investment Bank predicts that Gulf production is likely to mostly recover within a few months of reopening assuming:
-
no renewed strikes on oil assets and
-
a full and safe reopening of the Strait in coming months.
But, they also see “significant risks” that the last leg of the recovery will take significantly longer and may not fully materialize, especially if the Strait were to remain closed for much longer.
Interestingly, Goldman estimate that the available empty tanker capacity in the Gulf has halved since the start of the war, which would make it harder to boost supply once a peace deal is reached.
Goldman say that once the Strait safely re-opens, the key potential constraints on production will likely be
-
availability of pipeline capacity and empty vessels to destock previously produced oil, and
-
availability of materials and workers for field workovers, and
-
well flow rates
UK companies ramp up selling price expectations after surge in energy prices
UK companies are expecting to hike prices at a much faster rate over the next year, as the Iran war drives up energy costs.
New data from the Bank of England shows that companies expect to have raised prices by 4.4% by April 2027.
Back in February, firms had only expected to have raised their prices by 3.4% in a year’s time.
The increases suggests firms are “adjusting their expectations as a result of the recent increases in energy prices,” the Bank says.
Its latest survey of chief financial officers from small, medium and large UK businesses also found that expectations for year-ahead CPI inflation rose to 3.5% in the three months to April, up from 3.1% in the three months to March.
UK mortgage rates slip back again
The average interest rates on UK mortgages are continuing to slip back from the highs set earlier this month.
Data provider Moneyfacts reports:
-
The average 2-year fixed residential mortgage rate today is 5.81%. This is down from 5.82% the previous working day.
-
The average 5-year fixed residential mortgage rate today is 5.70%. This is down from 5.72% the previous working day.
Sarah Breeden’s warning that share prices do not reflect the many risks facing the global economy may have pushed the market down this morning, suggests Russ Mould, investment director at AJ Bell.
He explains:
The stock market reflects what investors think will happen in the future. While markets have been wobbly since the Middle East conflict unfolded, they didn’t pull back sharply in the early stages of the crisis, and more recently they’ve shown resilience. That suggests investors are confident the war will end quickly, and elevated oil and gas prices will retreat as supply is restored.
Oil prices currently trade at $105 per barrel which is higher than the sub-$70 price seen at the start of 2026, but below the $120+ level when Russia invaded Ukraine in 2022. One could argue current oil prices are high enough to cause pain for businesses and consumers as everything becomes more expensive. There are already signs it is causing problems for companies as they report cautious outlook statements.
Central banks such as the Bank of England will be watching key data points around inflation and the jobs market to see if interest rates need to change. It’s a tough call as a swift resolution to the Middle East could mean that an inflation spike is only temporary, and that monetary policy may not need to go down a different path. But wait too long to respond and central banks could face criticism that once again they didn’t act fast enough.
It’s unusual for a Bank of England official to explicitly warn about a potential stock market pullback, and the comment might have contributed to some of the FTSE 100’s decline on Friday.
Iran crisis hitting the German economy hard as business morale weakens
German business morale has deteriorated this month, as energy costs stemming from the Iran conflict threaten to derail the country’s economic revival.
The Ifo institute has reported that its business climate index fell to 84.4 in April from 86.3 in March, which is the lowest reading since May 2020, early in the Covid-19 pandemic.
An index tracking economic expectations dropped to 83.3 in April, down from 85.9 in March, which is the lowest level since August 2023.
Clemens Fuest, president of the Ifo institute, says:
Companies are considerably more pessimistic about the coming months.
The German economy is being hit hard by the Iran crisis.
Oil pushing higher again
The oil price has risen by almost 1% this morning, as the US and Iran continue to both impose blockades in the strait of Hormuz.
Brent crude has riesn to $106 a barrel this morning, towards the two-week high of $107.40 set yesterday.
Energy prices picked up after Donald Trump ordered the US military to “shoot and kill” small Iranian boats that deploy mines to choke traffic through the strait of Hormuz.
Hopes of an early breakthrough also withered after Trump replied “Don’t rush me” when asked how long he was willing to wait for a long-term peace deal with Iran.
There is some relief, though, that the US president also announced that a ceasefire between Israel and Lebanon would be extended by three weeks.
Susannah Streeter, chief investment strategist at Wealth Club, explains:
‘It’s shaping up to be a frustrating Friday, with oil prices on the march higher yet again and companies and consumers left counting the cost of the conflict. In just a week, we’ve had a sharp reversal of hope, with the key strait of Hormuz firmly shut and President Trump issuing shoot-to-kill orders to the US Navy for any boats laying mines.
Brent crude is up around 20% on the week and is trading around the hot level of $105 a barrel, as any hopes of an immediate easing of the crisis are shattered. President Trump has stressed he’s in no rush to end the war, and with the ceasefire extended for another three weeks, there’s set to be fresh financial pain ahead as key shipments from the region remain blocked. That is set to keep costs elevated for a vast array of commodities, from oil and gas to fertiliser and helium, which are vital for electronics manufacturing.
FTSE 100 opens lower
The London stock market is dropping in early trading, as investors digest the lack of progress towards ending the Iran war, and Sarah Breeden’s warning about stock valuations.
The FTSE 100 share index is down 48 points, or 0.46%, at 10,408 points.
Mondi (-5.8%) is the top faller, after the packaging group warned this morning that the Middle East conflict was pushing up its costs.
Japan’s Nikkei closes at record high
Japan’s Nikkei share index has ended the week at a new closing record high.
Stocks rallied as enthusiasm over earnings reports from the technology sector trumped anxiety over the Middle East conflict.
This lifted the Nikkei 225 index to a new closing high of 59,716.18 points, meaning it has risen by 2.1% this week.
Packaging firm Mondi lifting prices after Iran war drove up costs
Paper and packaging group Mondi is lifting its prices to offset higher costs due to the Iran war, amid ongoing tough trading that has seen it close factories and cut jobs across Europe.
The group – headquartered in Weybridge, Surrey – said 450 jobs were being axed this year after plans announced earlier this month to shut a further three factories in Hungary, Poland and Germany, PA Media reports.
It said the closures add to three recently announced across Turkey, Hungary and Germany as it takes “targeted actions to strengthen our competitive advantage” and looks to cut costs.
Mondi, which has operations worldwide including a factory in Birmingham, said trading had remained “challenging” in the first quarter of 2026.
The FTSE 100 group is hiking prices to offset rising costs caused by the Middle East conflict and soaring oil and energy prices, telling shareholders this morning:
Across the business, we have however experienced increased energy, raw material and logistics costs. We are actively responding with pricing actions.
“While there is a customary lag, we expect the impact of these price increases to take full effect in the third quarter of this year.”
Investor: ‘Markets appear to be experiencing increasingly marked cognitive dissonance’
On the issue of high stock markets… Emma Moriarty, portfolio manager at CG Asset Management (CGAM) reckons they’re exhibiting “increasingly marked cognitive dissonance”.
She suggests that share valuations don’t properly account for the energy shock caused by the Iran war, and are too optimistic, explaining:
The strait of Hormuz has been shut for eight weeks. The last ships went through on 28 February and are arriving at their destination now, implying that we have effectively reached the point where pre-closure supply is exhausted.
Commodity markets and government bond markets have repriced to reflect this. Oil and gas price curves continue to show tightness of supply in the spot and the next few months’ futures markets.
Government bond markets have priced in an inflation shock. In the UK, nominal interest rates have risen by around 50bp across the curve since pre-war levels.
OIS markets, which began the year pricing in 2-3 cuts to Bank Rate, now price in 1-2 Bank Rate rises, a reflection of stickier inflation expectations.
At the same time, short-term UK real interest rates have fallen, a function of increasing market expectations of inflation and lower growth over the coming years.
The impacts are also showing up in the real economy. Petrol and diesel prices are higher; industry bodies are warning of potential double-digit food inflation; the number of payrolled employees has fallen; demand destruction is beginning, with mass flight cancellations being one of the most visible examples.
By contrast, equity markets have continued their optimistic run: after a steep drawdown in the middle of March, the MSCI World Index is currently around 5% higher than it began the year – even after accounting for GBP appreciation over the period.
Motor fuel sales drove up retail sales last month
Retail sales across Britain last month were boosted by the dash to fill up cars as the Iran war drove up petrol and diesel prices, according to the Office for National Statistics this morning.
The ONS has reported that retail sales in Great Britain rose by 0.7% in March (up from a fall of 0.6% in February), as the Iran war pushed motor fuel prices steadily higher.
Retail sales volumes excluding automotive fuel rose by a more modest 0.2% over the month.
Over the January-March quarter, retail sales volumes rose by 1.6%.
ONS senior statistician Hannah Finselbach explains:
Retail sales rose in the three months to March, with commercial art galleries doing well earlier in the quarter and sales in beauty products stores rising as retailers reported launching new collections. Online shops also saw strong sales across the period.
“Motor fuel sales were up on the quarter, with retailers commenting that many motorists had been filling up their tanks in March following the start of conflict in the Middle East.”
That is slightly perplexing, though, as yesterday’s public finances showed that the amount collected in fuel duty in March was the lowest for any month since July 2023.
Trump threatens UK with ‘big tariff’ over digital services tax
The threat of a new UK-US trade war has reared up again, after Donald Trump has threatened to impose tariffs on the UK if it does not drop its digital services tax on US social media firms.
Speaking to reporters from the Oval Office on Thursday, the US president said:
We’ve been looking at it and we can meet that very easily by just putting a big tariff on the UK, so they better be careful.
If they don’t drop the tax, we’ll probably put a big tariff on the UK.”
The digital services tax, which was introduced in 2020, imposes a 2% levy on the revenues of several major US tech companies.
The Trump administration has been pushing back against it; in December, the US paused its promised multibillion-pound investment into UK tech in protest against trade barriers.
Introduction: Stock markets are too high and set to fall, says Bank of England deputy
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Stock markets are too high, and are going to drop back at some point due to the many risks facing the global economy, one of Britain’s top central bankers has warned.
Bank of England deputy governor Sarah Breeden has issued the prediction to the BBC, at a time when the US stock market has risen to record levels despite the Middle East conflict.
She points out:
There’s a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point.
This chimes with the latest assessment from the Bank’s financial policy committee, which pointed to the risks from high AI valuations, AI disruption, and the private credit market.
As she explains, the big fear is that several risks crystallise at the same time – such as an economic shock that leads to a rapid readjustment of AI valuations, and hurts confidence in private credit.
Breeden is clear that she’s not predicting a correction imminently … but is focused on making the UK financial system strong enough to cope.
What we are watching for: is how might those prices fall? Will there be a sharp adjustment downwards? And if there is such an adjustment, how will that affect the economy?
I’m not saying it will happen today, tomorrow, in 12 months’ time. It’s ensuring that if it happens the system is resilient.
The agenda
-
7am BST: UK retail sales report for March
-
9am BST: IFO survey of German business confidence
-
10.30am BST: Russia interest rate decision
