Anna Macdonald, Investment Strategy Director, Hargreaves Lansdown: "It has been a bruising weekend for Keir Starmer. Local election results delivered a sharp message from voters on two fronts. Reform made inroads in traditional Labour heartlands across the north of England, where Brexit sentiment remains strong, while the Greens picked up seats in the south among voters frustrated by the pace of change on spending. In Wales, Labour lost its majority in the Senedd, and in Scotland, the SNP are the largest party for a fifth term, with John Swinney returning as First Minister. The Prime Minister heads into Monday morning with his authority shaken and a significant speech to deliver, which is expected to cover the UK’s relationship with the European Union.
The FTSE 100 is, as ever, a poor proxy for the UK domestic economy, as most of its constituents earn revenues overseas. It is in the gilt market and in the pound where UK political risk tends to show up most clearly. Any sign that markets are losing confidence in the government’s economic management may put upward pressure on borrowing costs and weigh on sterling. We will be watching this throughout the day.
Away from Westminster, two significant reports today added to a growing picture of a UK economy that is losing momentum. The ITEM Club pointed to weakness in manufacturing and construction, sectors squeezed by higher energy costs. This chimes with what housebuilders have been saying, several of whom have flagged margin pressure from higher input costs, as well as planning delays and affordability constraints, which are weighing on volumes. Meanwhile, the Recruitment and Employment Confederation’s latest survey showed more businesses opting for temporary rather than permanent hires. That is a telling signal. When companies are uncertain about the outlook, they avoid locking in fixed employment costs. It does not necessarily point to rising unemployment in the near term, but it does suggest that business confidence is weakening.
Zoom out from the domestic picture, however, and the mood is somewhat more constructive. Donald Trump travels to Beijing this week for talks with President Xi, with an extension of last year’s trade truce firmly on the agenda. A six-to-twelve month rollover looks achievable as neither side has an obvious incentive to let the ceasefire expire. China has insulated itself reasonably well from the spike in global energy costs that has followed the conflict in the Middle East, managing domestic fuel pricing, holding substantial strategic reserves of oil and coal, and having made significant strides in renewable energy capacity. The US, for its part, holds its strongest cards in advanced semiconductors, where Chinese access remains a live issue. On the other hand, China will continue to leverage its dominance of rare earth production.
On the company front, four names stand out this week. National Grid reports full-year results against the backdrop of its ambitious £70bn five-year infrastructure investment plan, a 70% uplift on the prior period, as it positions itself at the heart of the electrification of industrial demand and the surge in data centre energy needs driven by AI. Analysts are forecasting revenues to hold broadly flat at around £18.3bn, with operating profits growing at a faster pace of nearly 8% to £5.8bn, helped by improvements in its UK transmission business. Vodafone updates investors amid ongoing questions about the pace of its strategic simplification. Burberry, still in the early stages of a significant turnaround, will give the market its latest read on whether demand for luxury goods is stabilising after a difficult period. And Greggs reports as it pushes ahead with a target of 120 net new store openings this year, extending trading hours to capture the evening occasion. Sales rose a healthy 6.3% in the first nine weeks of the year, but the consumer backdrop has tightened since then, and the knock-on effects of the Middle East conflict on household confidence will be worth watching in its latest numbers."
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