UK markets show resilience despite fiscal headwinds
The FTSE 100 gained 0.3% in early trading on Tuesday, with strength in banking and energy sectors helping London outpace its European counterparts. The advance came even as gilt yields edged lower by approximately two basis points, reflecting cautious sentiment around UK government debt.
Sterling weakened slightly, slipping below $1.34 and losing 0.1% against the US dollar. The currency’s modest decline followed news that UK public borrowing exceeded forecasts, whilst long-term debt costs remained elevated. These factors add complexity to Chancellor Rachel Reeves’s preparations for next month’s budget.
The performance of UK shares suggests investors remain selective, favouring sectors with defensive characteristics or commodity exposure. Banks benefited from expectations that higher-for-longer interest rates will support net interest margins, whilst energy companies gained ground alongside firmer oil prices.
Despite the positive open, broader concerns about the UK economy persist. The latest data on commercial construction activity painted a particularly challenging picture, with implications for business investment and economic growth prospects.
Public finances strain ahead of budget
September’s public sector borrowing reached £20.2 billion, marking the highest level for the month since 2020. This figure came in above economists’ forecasts and highlights the fiscal challenges facing Chancellor Reeves as she prepares her autumn budget statement.
The elevated borrowing figures reflect ongoing pressures on public spending, including debt servicing costs that remain high due to elevated interest rates. Long-term gilt yields staying elevated suggests bond markets remain cautious about the UK’s fiscal trajectory.
These fiscal dynamics will likely influence government policy decisions in the coming budget. Reeves faces a delicate balancing act between maintaining public services, supporting economic growth, and demonstrating fiscal responsibility to bond markets.
Investors in UK government bonds and currency markets will scrutinise budget announcements carefully. Any signals about future tax and spending plans could trigger significant moves in gilt prices and sterling exchange rates.
Construction sector highlights investment weakness
The commercial construction sector delivered disappointing data, with office, retail and industrial building activity plunging 21% year-on-year (YoY) to an 11-year low. This sharp decline underscores the weakness in post-Brexit business investment that continues to weigh on the UK economy.
The construction slump reflects multiple factors, including uncertainty about economic prospects, higher financing costs due to elevated interest rates, and structural changes in how businesses use office space. Retail construction has also suffered from the ongoing shift towards online shopping.
This weakness in construction activity has broader implications for economic growth. The sector traditionally serves as a leading indicator of business confidence and investment intentions. The current downturn suggests companies remain cautious about committing capital to long-term projects.
For traders monitoring UK economic indicators, construction data provides valuable insights into business sentiment. Sustained weakness in this sector could signal that economic headwinds will persist, potentially influencing Bank of England (BoE) policy decisions and forex trading opportunities in sterling pairs.
Corporate updates drive individual share moves
Several major UK-listed companies provided updates that moved their share prices. Bunzl, the distribution and outsourcing group, reaffirmed its guidance for the year, suggesting its business performance remains on track despite economic headwinds.
Coca-Cola HBC announced it had agreed to acquire a 75% stake in Coca-Cola Beverages Africa, marking a significant expansion of its geographic footprint. The deal represents a strategic move to increase exposure to faster-growing African markets.
Unilever revealed it would delay the demerger of its ice cream business, which includes the Magnum brand, citing complications related to the US government shutdown. The postponement highlights how political developments can impact corporate restructuring plans.
Global markets hit record highs
Asian equity markets reached record levels overnight, with global stocks hovering near all-time peaks. The positive sentiment reflected strong US corporate earnings, easing tensions between the US and China, and growing expectations of Federal Reserve interest rate cuts.
Japan’s Nikkei 225 extended its record-breaking run, rising 0.4% to 49,404 points following the election of Sanae Takaichi as prime minister. However, gains were trimmed later in the session as investors assessed how her minority coalition government might limit the scope for aggressive fiscal stimulus.
Taiwan and South Korea saw their benchmark indices hit fresh record highs, benefiting from optimism about the technology sector and easing geopolitical concerns. Japanese bond and currency markets remained relatively stable, with the 10-year government bond yield at 1.66% and the yen trading near 151 per dollar.
Wall Street rebounded strongly in the previous session, with the Dow Jones Industrial Average climbing 516 points. Apple shares surged 4% following an analyst upgrade, whilst broader market sentiment improved on hopes that the US government shutdown would soon end.