WeeklyWatch – What do local election results mean for markets?

12^th May 2026

Stock Take

The pressure’s on – local election results and government borrowing pressure

The UK local elections left Labour feeling bruised, leading to media reports questioning the security of Prime Minister Keir Starmer’s position. But looking at the UK bond market, it seems stability of continuity is preferred over a change in leadership – for now.

Borrowing costs haven’t been the current government’s friend. It’s been nearly two years since the last general election, and 10-year gilt yields (i.e. the interest the government pays on the bonds) have increased from below 4% to a peak of over 5%.

Higher yields are challenging for governments – because it results in more expensive borrowing, it limits government’s options surrounding taxes and spending.

The majority of the causes of this rise are beyond the government’s direct control. Factors include an ageing population, a large amount of debt and the behaviour of foreign powers, to name a few.

Within the last two weeks, high oil prices and local election predictions have both contributed to 10-year gilt yields spiking to over 5% – the first time since 1998.

What happened at the elections?

There were notable results from the local elections: last Tuesday gilts reached their highest point and then gradually fell back down to below 5%.

Reform and the Green Party made an impact at the expense of traditional parties, and the increased yields became a good reflection of market perception on the possible uncertainty this could cause, particularly if it lasts until the next general election, which is due before 15^th August 2029.

Reform ended up winning the largest number of councillors, with Labour and the Conservatives losing out the most on the day.

Despite this, bond investors remained encouraged following Starmer’s reiteration of his plan to stay the course of the current government. But with yields floating around 5% and several reports discussing plans to oust him, it shows that the optimism wasn’t particularly far-reaching.

A possible end to the Iran conflict?

Outside of domestic politics, investors took comfort from reports that suggested that a peace deal in Iran was looking more likely.

Oil prices dropped significantly on Wednesday when reports came out of a one-page memorandum of understanding that was close to being agreed upon. WTI crude oil decreased from over $100 per barrel to slightly over $90 – it ended the week just over $95. However, there’s still a large gap between the current price and the sub-$60 prices that it was trading at prior to the Iran conflict.

Despite the initial positive signs, the optimism began to wane over the weekend when reports revealed that more tankers had been hit and seized. This took a further negative turn on Monday when Trump regarded Iran’s peace proposal as ‘unacceptable’. As a result, oil prices increased.

Further optimism in the US markets

US equities seem to have weathered the storm of the Iran conflict well. At the end of last week, they posted more strong returns and continued to move up into record territory.

Tech companies have been the main driver of this growth. They struggled at the beginning of the year as a result of investor concerns about high spending on AI and the time it would take to make returns. Since then, it looks like some of these worries have subsided. After March lows, the sector has recorded double-digit growth. And chip makers are feeling the boost too, with companies like Intel and AMD seeing their value double over the last month.

Shares have been boosted by the recent earnings season, which surpassed many expectations. The wider performance is reflective of the increased optimism that the impact of the Iran conflict will be short-lived.

But the Equity Strategist at St. James’s Place, Carlota Estragues Lopez, warns that the optimism might be premature. She says:

“Equity markets have been quick to price in the de-escalation narrative, but less patient in pricing the economic damage of the conflict. One risk that may be underappreciated is that inflation doesn’t need to reaccelerate sharply to matter, it just needs to remain sticky enough to keep pressure on earnings expectations. So, while the index rally makes sense if the worst outcomes are avoided, the overlooked risk is complacency around inflation persistence.

“The first quarter earnings season covers results announced from mid-February to mid-May and doesn’t capture the full extent of the impact of the conflict. Even in a contained scenario, we still have to work through issues like inventories, insurance costs, shipping routes and margin pressure, which may become more evident in second quarter earnings season.”

Friday brought good news regarding US jobs. April saw 115,000 non-farm jobs added, which exceeded expectations. Wage growth increased slightly to 3.6%; however, this wasn’t enough to reverse the longer-term downward trend.

Overall, the figures suggest that the labour market is fairly healthy. But it won’t be enough to move the needle for the Federal Reserve, who are likely to keep focused on inflation when they next discuss interest rates.

Wealth Check

A stretch for homebuyers – the most since 2008

More than a fifth (21.3%) of homebuyers’ gross income was committed to meet mortgage payments in 2025 – this is the highest level since the global financial crisis. This is according to a UK Finance report, which highlights intensifying affordability pressures on homebuyers across the country.¹

Even though costs have increased, house purchase mortgage completions have gone up by 17% year-on-year in 2025 to 723,000.

The report also showed the pressures for borrowers across the buy-to-let sector, where there’s been a reduction in returns and many landlords have chosen to leave the market.

Landlords face a much more challenging environment as a result of stamp duty surcharges, the progressive removal of income tax relief for mortgage interest, higher mortgage costs and stricter underwriting standards.

Additionally, the Renters’ Rights Act that recently came into law is also likely to add further costs and a further administrative burden on beleaguered landlords.

Mental Health Awareness Week 2026

Mental Health Awareness Week, the annual campaign that highlights issues surrounding mental health, is happening this week.

The initiative is run by the UK charity Mental Health Foundation, who encourage people to initiate conversations, offer support and advocate for changes to improve mental health.

This year, the theme is ‘action’, and the charity are encouraging people to do something for themselves or for someone else to support and promote good mental health.

Money concerns can be an unwelcome cause of stress, but there are several steps you can take to improve your financial well-being and mental health. These include:

• Creating a small emergency savings fund. By having a buffer, your sense of security can improve.
• Having a conversation with a trusted friend, family member or professional financial adviser so you can voice any financial concerns.
• Forming frequent positive actions like regular saving and bill payments to help reduce decision fatigue.

Source

¹UK Finance (2026). Loans Where We Live: Regional mortgage market compendium 2026. Available at: www.ukfinance.org.uk/system/files/2026-05/Loans%20where%20we%20live%20-%20Regional%20mortgage%20market%20compendium%202026.pdf (Accessed: 11^th May 2026).

In the Picture 

Currently, UK intermediate and long-term gilt yields have reached, or are near, multi-year highs – reflecting a difficult economic outlook and concerns closer to home (weak economy, high dependency on imported energy and political uncertainty). This unappealing risk profile means that UK bond yields are higher than its G7 peers.

Higher borrowing costs will limit the government’s ability to increase spending and reduce taxes – many more tough decisions may lie ahead.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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