Stock Take
Rise in UK political uncertainty
After weeks of speculation and growing pressure, Keir Starmer announced his resignation as prime minister on 22 June. It comes after just under two years in office and means the UK will soon have its fifth prime minister in as many years. However, the next steps remain unclear. Even in the event of a smooth ‘coronation’ to a successor, the process could take several weeks.
Immediately after the announcement, the UK market took Starmer’s resignation largely in its stride, although the pound weakened in anticipation of his resignation. The FTSE was very marginally down while gilts held steady in the hours after the news was released on Monday morning. However, a big question, not least for markets, will be who becomes the next chancellor if, as expected, Rachel Reeves is moved from her current position.
Hetal Mehta, St. James’s Place’s Chief Economist, says: “Given the current situation, policy uncertainty – especially regarding the fiscal stance – could remain elevated for months, i.e, until the next Budget.
“Without cuts to day-to-day spending and welfare, any attempts to boost investment or reduce the real terms spending cuts some government departments are facing, would require tax increases.”
A busy week in the US
It was a holiday-shortened week in the US, with markets ending higher. Markets also experienced their first Federal Reserve (Fed) interest rate decision under the leadership of new chair Kevin Warsh. Meanwhile we also saw the tentative reopening of Strait of Hormuz, as well as the signing of a 60-day memorandum of understanding (MOU) between the US and Iran in advance of more substantive talks.
The AI and tech steamroller keeps on moving
Boosted by the SpaceX listing, AI and tech now account for almost 60% of the total US stock market. These two sectors also represent almost 50% of the S&P 500. Diving deeper, the $25 trillion market cap of the top ten quoted companies in the US makes them the world’s second largest stock market if viewed separately. Their combined value also exceeds the $19 trillion GDP of China, the world’s second-largest economy.
Federal Reserve – a new sheriff in town
The key event during the week was the US Federal Open Market Committee (FOMC) meeting. Less because of the update (maintaining the current 3.5%-3.75% level), but in the accompanying statement. This was considered hawkish, increasing expectations that the next move by the central bank, the Fed, will be to raise, not lower, rates. In addition, there will be no more forward guidance about the central bank’s rate setting intentions. Warsh has made it clear the Fed’s focus will be price stability.
Proponents of forward guidance argue that the visibility this offers the market provides reassurance and minimises the chances of unwelcome shocks. Warsh’s view is that the Fed needs to maintain flexibility of action, which can be best achieved by less talk. The FOMC’s statement signalled that reducing inflation to its 2% target remained the Fed’s key focus. Analysts suggest the Fed’s new approach will involve more analysis of where inflation and key economic indicators are heading. Likewise, it will be up to investors to do their own homework.
The immediate market reaction was a sell off, with both the S&P 500 and Nasdaq falling more than 1% in a few minutes. US treasury yields rose (and prices fell), while the US dollar strengthened. This was a continuation of the previous week’s narrative that a rate hike, not a reduction, is likely to be the Fed’s next move.
US and Iranian ceasefire extended
Both countries signed a 60-day memorandum of understanding (MOU) during which detailed negotiations will be undertaken on shipping through the Strait of Hormuz and Iran’s nuclear ambitions. The Strait of Hormuz is expected to be open to all shipping during this period, but reports at the weekend indicated the Iranians had closed it once again in response to Israeli strikes in Lebanon. Israel has said it will not be bound by the MOU, raising uncertainty about how credible any eventual agreement can be.
Despite President Trump’s insistency, it is difficult to view this half-way house to a peace deal as a decisive US victory. While it was able to achieve some tactical gains, such as damaging Iran’s nuclear infrastructure and reopening the Strait of Hormuz, strategically the position is much as it was before the outbreak of war.
By contrast, the Iranian regime has survived everything thrown at it by the US. This may embolden it in future dealings across the region and beyond. Crucially, Iran’s leverage over the Strait of Hormuz, one of the world’s critical energy chokepoints has been strengthened.
The real negotiations start now. While the immediate crisis may have eased, many of the catalysts for the original outbreak of hostilities remain. The risks of future disruption, particularly to global energy flows with adverse effects on the global economy, remain.
UK inflation – a downward surprise
May consumer inflation of 2.8% compared with the previous year was lower than analysts had expected. Lower food prices seem to have been the reason. Hetal Mehta, SJP’s Chief Economist, commented that “firms just don’t seem to have the pricing power to pass higher costs on to consumers.” She cautioned that food price inflation was hard to project. On that basis it would be premature to assume domestic inflation had peaked.
Thursday’s decision by the BoE to hold interest rates at 3.75% came as little surprise. While two of the seven-member Monetary Policy Committee voted for a rate hike, the consensus view was that the global energy spike had yet to work its way into the broader economy. The sluggish jobs market and the fragile state of the economy may keep a lid on inflationary pressures. Fast moving events in the Middle East and the rapid fall in the oil price (-8% over the week) support this narrative.
Earthquake in Makerfield
UK gilts rose following Andy Burnham’s victory in the Makerfield by-election. Over the week, 10-year gilt yields are slightly higher, though they remain well below the 5.2% level reached in mid-May. Should Burnham replace Keir Starmer as prime minister, he has said that he will commit to chancellor Rachel Reeves’s expenditure and borrowing rules that tax receipts should cover the government’s day-to-day spending, while net debt as a proportion of final economic output (GDP) should fall from the 94% level at the end of 2025. Some of the advisers Burnham has assembled argue that these rules are too restrictive and that more government investment is needed to drive economic growth. The Organisation for Economic Cooperation and Development forecasts UK GDP will fall from 1.4% in 2025 to 0.9% in 2026.
Wealth Check
HMRC turns spotlight on tax payments from business sales
HM Revenue & Customs (HMRC) is increasing its scrutiny of tax payments made by entrepreneurs following certain types of business sale. This is due to disputes over the type of tax which should apply in these complex cases.
Tax experts have reported that HMRC is intensifying its review of earnouts, which are a type of business sale structure. Typically, these involve the founder selling their company but continuing to be involved in it, for example receiving payment via shares in the acquiring company.
In earnouts, it is common for buyers and sellers to disagree over the value of the company. As a result, founders may receive additional cash, shares or other payments after the initial sale has been completed.
But while commercially practical, these arrangements often create uncertainty over how such payments should be taxed.
A key issue is whether payments should be treated as capital gains or income for tax purposes. If treated as capital gains, the money is typically taxed at up to 24% for higher and additional taxpayers.
In contrast, if the payments are considered employment-related (reflecting the founder’s role in the company) they are subject to income tax. In this case, the tax rate can reach 45% for additional rate taxpayers.
Experts say HMRC increasingly views employment-related payments to be income. This is usually deemed to be the case when the founder retains a significant role in the company post-sale.
But a mix or split treatment is also possible. HMRC’s guidance highlights that some proceeds initially expected to qualify for capital gains treatment may now need to be reclassified as income.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
In The Picture
British exports to the EU have been gradually declining since the start of the millennium, with other markets taking a greater market share. While the trend existed before Brexit, there was a noticeable drop off at the start of 2021 when the UK formally left the EU single market, as the chart shows.
Despite a slight recovery in the year that followed, it has since returned to its downward trend. The United Stats has been a notable winner from the trade friction between the EU and UK. Even after Trump’s tariffs added extra headaches to EU-US trade, US imports remain well above where they were pre-2021.
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SJP Approved 22/06/2026