Staff Reporter
The FTSE 100 experienced a notable surge on Thursday, buoyed by overseas earners capitalising on a declining pound amidst growing concerns regarding the UK’s economic outlook.
Despite negative performances from retail giants Marks & Spencer, Sainsbury’s, and Tesco, the rally led by multinationals listed in London proved resilient, highlighting the FTSE 100’s inverse relationship with sterling. Today’s trading exemplifies why the index does not accurately reflect the UK economy.
The FTSE 100 is frequently regarded as a defensive index, largely due to its significant representation of overseas earners who typically benefit from a weaker pound.
Often, a depreciating pound is linked to increased demand for the dollar, driven by risk aversion in financial markets. However, the current decline in sterling appears to stem from mounting anxieties about the UK economy, which have pushed bond yields to levels not seen in many years.
Sentiment towards the UK has soured this week, as concerns escalate regarding the country’s fiscal stability and economic prospects, influenced by recent policy choices from the Labour government.
“Recent turmoil in the markets signifies a profound loss of confidence in the UK government,” remarked Russ Mould, investment director at AJ Bell. “The 30-year gilt yield briefly reached 5.445%, exceeding the levels seen during the Liz Truss crisis, while the pound sank to $1.2256 against the US dollar, marking its lowest point since November 2023.”
“The optimism that followed last summer’s general election has swiftly dissipated, giving way to uncertainty as companies prepare for rising costs and consumers grapple with concerns over job security and an impending rise in the cost of living.”
Investors are expressing unease over the government’s plans for additional borrowing. However, it is important to note that the pound remains significantly stronger than during Liz Truss’s brief tenure as Prime Minister. The UK is not alone in facing rising borrowing costs, as the United States has also experienced higher yields.
As the pound fell against the dollar, companies reporting earnings in dollars surged to the top of the FTSE 100 leaderboard. Mining firms led the index’s ascent, with Antofagasta soaring by 4.9%. Anglo American and precious metals miner Fresnillo also saw gains of over 4%.
Other notable performers included Smith & Nephew, Shell, InterContinental Hotels, and AstraZeneca, all benefiting from the weaker pound.
A number of retailers, including Marks & Spencer, Tesco, and B&M, reported their results on Thursday, but the market response was decidedly negative. Despite some sales growth, investor expectations were high, and concerns surrounding the UK economy are unlikely to ease the pressure on companies heavily reliant on domestic earnings.
Marks & Spencer’s shares plummeted by 6% despite the group enjoying its strongest trading period ever over the Christmas season.
“Although retailers Tesco, Marks & Spencer, and B&M reported resilient performances over Christmas, their shares faced pressure as a pessimistic market seized on any trace of negativity. The wider context of soaring UK gilt yields and a declining pound is doing little to bolster sentiment towards domestic stocks,” explained Russ Mould.
At the time of writing, Tesco’s shares were down by 1%, dragging Sainsbury’s down along with them.
