Susannah Streeter, Chief Investment Strategist, Wealth Club: “It’s been another lacklustre start for the Footsie as crude prices have stayed stubbornly above $100 a barrel, with no relief in sight. Hopes that there would be some kind of resolution before the US mid-terms, to offer relief at the pumps for voters, have been dashed, with President Trump warning the conflict won’t end before the elections. He’s trying to woo the electorate instead with helicopter money, offering $5,000 cheques if Republicans retain control of Congress, but this will be sugar-rush money, and while it may boost spending in the short term, it will only add to concerns about the profligate nature of his presidency.
These concerns are showing up as warning lights in the bond markets, especially with Norway’s sovereign wealth fund proposing to cut its US Treasury holdings by potentially tens of billions of dollars. A decision by US Treasury Secretary Scott Bessent to ramp up bond buybacks landed like a damp squib. It signalled the administration is worried about yields, but the scale of the buyback suggests it isn’t prepared to throw serious financial firepower at the problem. Steamy energy prices appear to be the trigger for these latest moves higher in yields, but there’s been an underlying structural shift in the global flow of money for some time as some of the world’s biggest institutional investors rotate away from Treasuries to seek returns in corporate debt, with a huge stream issued by AI hyperscalers. Add in the prospect of higher defence spending as geopolitical tensions rise, and there is potentially an even bigger supply of bonds looking for buyers.
And what happens in Treasuries doesn’t stay in Treasuries, with the pressure spilling over into other government debt, including gilts. Bond markets are closely connected, with investors constantly comparing the returns available from US Treasuries, UK gilts and other major sovereign debt. The European Central Bank meeting is in sharp focus today, with a hike in interest rates widely expected. Although the decision in itself is not set to be a market mover, President Christine Lagarde's comments will be closely watched for the direction of travel ahead. While she's stressed a future hiking path isn't set in stone, with Eurozone inflation staying creeping higher and hotter energy prices building, speculation is building about future hikes ahead.
There is specific UK pressure building as well, with investors looking ahead to the looming Budget, with government finances already under considerable pressure. Higher oil prices threaten to keep inflation elevated, while higher borrowing costs are already eating into the government’s fiscal headroom. The UK has already had to pay its highest yield on a 30-year gilt since the Debt Management Office was established in 1998, at 5.82%, underlining just how sensitive the public finances have become to higher borrowing costs. But demand for the debt was still strong, with investors putting in orders worth more than £87 billion for the £4.25 billion being sold, showing that investors are still willing to buy UK government debt, but at a very high price.
For households and businesses, the consequences eventually filter through in the form of more expensive mortgages, loans and corporate borrowing, potentially weighing on investment and growth, which is why there’s so much caution around on equity markets too.
Lacklustre trading has helped propel fast fashion giant Primark into making a U-turn it’s resisted for years. Primark is finally joining the home-delivery party, despite a record of repeatedly insisting that its cheap prices made online shopping too expensive to make sense. The retailer now says the success of Click & Collect, improving digital capabilities and a highly automated fulfilment centre in Sheffield have changed the maths, which is why it’s lurched into this U-turn. So customers will be able to get their fashion fix delivered when Primark spins off from parent company ABF, with the demerger targeted for the end of 2027.
The economics of home delivery have shifted, with customers also more used to having to pay fees for returns, and the dominance of Shein set to be eroded with the tax treatment of small parcel imports set to change. Primark has benefited from a loyal customer base, and its social media presence keeps them across new styles landing in stores, but its agility has been stifled given that it’s been so slow to adapt to the biggest shopping trend this century – e-commerce. Gone are the days post-pandemic when huge queues snaked round the block to snap up bargains once shops re-opened. It’s facing much tougher competition from high street rivals who can keep the digital tills running and parcels landing when conditions turn more inclement. The rolling heatwaves are likely to be partly why Primark’s sales have come under sharp pressure as customers have stayed away from scorching high streets amid stifling temperatures. Like-for-like sales are set to be down 3.0% in its fourth quarter to September 12, and UK and Ireland have fared a little better, with sales up marginally by 0.4%, while it’s been a struggle across continental Europe where they fell 4.3%. The European market arguably also needs a home delivery boost, but it’ll have to wait as the new delivery service is only reserved for the UK, for the meantime. So there’s no quick fix available yet for Primark’s sliding sales in key markets, while the rollout of the home delivery system in the UK won’t come cheap. So investors are turning increasingly sceptical about Primark’s prospects, with ABF shares down by more than 9% in early trading.
And the going has got tougher for John Lewis as it's squeezed by challenging consumer behaviour. Sales fell 2% to £2 billion in the six months to August 1, despite revenues across the wider Partnership rising 2%, helped by Waitrose. Shoppers are becoming increasingly cautious about big-ticket purchases, while extreme heat also kept people away from heading out on big shopping sprees. While the soaring temperatures over the summer might have boosted online sales of fans and outdoor goods, and picnic treats, it's made shopping a less attractive hobby as households found ways to cool off instead. When they do want to browse online or in-store, shoppers, with increasingly tight budgets, are being more choosy, looking for bargains or discount sites for a retail fix.
The department store concept is clearly past its prime. In its heyday, they sat at the head of the high street table, but their dominance has been eroded by more agile players, quicker to spot trends and more competitive on price. Shoppers now demand a bigger experience than five floors of goods with the odd demonstration and café thrown in, and John Lewis is struggling to demonstrate its relevance in the new retail landscape.”
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