FTSE 100 Struggles as Defence Stocks Rally Amid Political Transition and Rising Unemployment

London’s blue-chip index opened marginally lower on Tuesday morning, with the FTSE 100 shedding 22 points to reach 10,502 as investors digested a confluence of corporate developments, weaker economic data and policy signals from newly appointed Prime Minister Andy Burnham.

The index faced early pressure despite an overnight recovery on Wall Street and across Asian markets, where technology shares led a rebound. Japan’s Nikkei advanced 1.75 percent whilst Seoul’s Kospi climbed 3.6 percent, following gains in US technology stocks that temporarily eased concerns about overvaluation in the artificial intelligence sector.

Sterling and government bonds stabilised following the unexpected appointment of John Healey as Chancellor. Healey, who previously resigned from Keir Starmer’s cabinet over defence spending policy, has consistently advocated for military expenditure to reach 3 percent of GDP and has supported the introduction of war bonds. Markets interpreted the appointment as a credible signal of increased defence spending commitments, triggering a sharp rally in defence-related equities.

Babcock International surged 6 percent, whilst BAE Systems, Chemring and QinetiQ all registered gains. The sector-specific strength proved insufficient to lift the broader index, which declined 0.4 percent as a tenth consecutive day of US military strikes on Iran dampened risk appetite.

Nervousness is mounting regarding the fiscal implications of Burnham’s early policy pledges, which include value-added tax reductions on energy and the provision of free social care. Much of this proposed spending remains unfunded, raising concerns that a fiscal risk premium could push gilt yields back towards their May peaks, particularly as oil prices resume their upward trajectory.

June’s public sector net borrowing data provided modest reassurance, coming in at £16 billion, some £300 million below consensus forecasts. The pound strengthened to approximately $1.35, its highest level since the beginning of the year, whilst gilt yields edged higher as markets assessed the new administration’s fiscal trajectory.

Fresh labour market statistics revealed concerning trends less than 24 hours into Burnham’s tenure. The unemployment rate increased to 4.9 percent in the three months to May, marking its highest level in recent months. Payrolled employee numbers declined by 85,000 over the year, whilst job vacancies fell by a further 7,000 to 712,000. Smaller firms appeared increasingly reluctant to expand headcount amid rising wage pressures and operational costs.

Regular pay growth remained at 3.4 percent, continuing to outpace inflation and offering some relief for workers. Private sector pay growth, however, dipped below 3 percent for the first time since 2020, underscoring the rapid cooling of what was once an overheated labour market.

Corporate activity featured prominently in Tuesday’s trading session. Compass Group reaffirmed its profit guidance following a robust quarterly performance, whilst the London Stock Exchange announced the launch of a new overnight trading venue. On the mergers and acquisitions front, facilities management group Mitie agreed to a £3.1 billion cash takeover by rival OCS. Prologis intensified pressure on warehouse operator SEGRO after the latter rejected a third bid valued at £13.5 billion.

Geopolitical tensions continued to weigh on sentiment, with Brent crude holding near $90 per barrel amid ongoing US military operations against Iranian targets and heightened concerns surrounding the Strait of Hormuz. Iran’s Revolutionary Guards claimed to have struck US military installations in Bahrain and Kuwait, though oil prices subsequently eased slightly, with Brent North Sea crude falling 0.63 percent to $88.59 per barrel and West Texas Intermediate declining 0.3 percent to $82.98.

Analysts cautioned that the recent rebound in technology shares did not reflect a decisive improvement in artificial intelligence fundamentals. Forthcoming earnings reports from Tesla, Alphabet, Microsoft, Meta, Apple and Amazon will prove critical in demonstrating whether AI-related revenues, margins and cash flows can justify the substantial infrastructure investments made by the sector.

The FTSE 100 was projected to open approximately 64 points lower despite the positive overnight session in US and Asian markets, reflecting persistent concerns about geopolitical instability, fiscal policy uncertainty and weakening domestic economic indicators.