Defence stocks lifted after John Healey named Chancellor, pound and gilts steady as wage growth cools

The pound held steady along with gilts after Andy Burnham named John Healey as his Chancellor, a surprise move, with his name not part of the conversation until now – by Saxo UK Investor Strategist, Neil Wilson.

His appointment is interesting since he has repeatedly called on the government to raise defence spending to 3% of GDP and resigned from Keir Starmer’s cabinet over this point and backed the idea of war bonds – new issuance to cover the cost of extra defence spending. These are big fiscal considerations – will the same John Healey rule the Treasury as the one who ran the MoD? After initially selling off yesterday afternoon both gilts and the pound have found some support and are a bit steadier today – but I would reiterate there is growing nervousness in markets about potential spending implications of the announced policies – there were always big spending vibes about Burnham’s ascendancy, but we are seeing emerging signs of big spending commitments as well. Healey brings Treasury experience and indicates adherence to fiscal rules is important but Burnham has also been talking about creating a “new economy” and finding “flexibility” in fiscal rules to borrow more.

As flagged last night this was going to be viewed initially as good for the UK’s defence sector with investors seeing a clear read across from the appointment to a higher defence budget. This morning defence stocks have rallied sharply on the appointment – Babcock +6%, BAE Systems +3%, Chemring +3%, QinetiQ +4%, Cohort +2%. Investors could be left disappointed if he can’t make the sums add up to find new cash down the back of the sofa for defence – the fiscal constraints remain and there is little room to move on those. But I would stress that quite apart from the obvious signal it sends by appointing Healey there is a growing consensus for a new fiscal compact to find more money for defence in the long-term –which implies likely higher borrowing and some reduction in welfare. The question is whether Burnham has the stomach to do the latter. I think he definitely has appetite for the former and has talked up utilising any flexibility in existing fiscal rules.

The lift for defence stocks and a rally in the miners wasn’t enough to rally the FTSE 100 as the blue chips fell about –0.4% early Tuesday amid a flattish open for the rest of Europe. A tenth day of US strikes on Iran weighs on risk sentiment broadly but Asian equities found some bid as tech rebounced following days of losses. US tech shares mounted something of a rearguard and attempted to rally yesterday but fell flat as the session wore on, leaving the Nasdaq composite and NDX flat for the session, while higher oil prices weighed on the broader market to send the S&P 500 down –0.2%. The Philly Fed semis index managed to rally a bit yesterday and the Kospi has added about 3.5% in Korea overnight.

So far the Burnham Primacy has been marked out by pricey pledges – the first a move to cut VAT on domestic energy. This was the promised cost-of-living support “that could make a difference this year”. Burnham and co say scrapping the digital ID scheme pays for it – but the latter was unfunded. He’s also spoken about using “any flexibility” in fiscal rules to invest in infrastructure, and mooted tax cuts for lower earners as well as implying that social care could “operate on the NHS principle” of being free at the cost of service (£18bn cost)…signs of looser spending abound. What appear to be as yet unfunded pledges may well attract a fiscal premium at a time when oil prices have jumped again – this could push gilt yields to retest the May peaks.

Better news on borrowing today though – £16bn borrowed in June was £300mn below forecast. However, one swallow doth a summer not make…or something like that… underscoring the scale of the challenge borrowing the first three months of the financial year overshot the OBR’s forecasts by £2.7bn.

Separate data showed the UK labour market remained soft in the three months to May, a print that gives plenty of reasons for the Bank of England to stay put with rates next week. Although the unemployment rate held steady at 4.9%, hiring remained very weak and private sector wage growth declined to a five-year low, pointing to stagnating real wages over the rest of the year, which obviously raises big cost-of-living concerns for Burnham.

Finally – like to flag IQE, the Cardiff-based supplier of compound semiconductor wafer products and other advance materials, which has raised guidance on strong AI-related demand. Shares popped +12% as management forecast revenue growth of more than 30%