Market report: Hopes for Ukraine peace but wariness over high borrowing costs
Susanah Streeter, head of money and markets, Hargreaves Lansdown: “While there is more optimism washing around that peace in Ukraine might be achievable, wariness remains about the outcome of what’s been a war of attrition. More upbeat sentiment about the potential easing of geopolitical tensions, is colliding with concerns that interest rates look set to stay higher for longer in the UK. The FTSE 100 has opened flat but is still trading close to its recent highs as the British stocks remain attractive to investors.
There’s relief that talks between Trump, Zelensky and European leaders appear to have made good progress. With the US president sounding highly positive on giving security guarantees and protection to Europe, it has bolstered hopes for a longer lasting settlement. Ukraine is offering to purchase around $90bn of American-made military equipment as part of the deal. As the re-armament of Europe continues, to counter the threat of further Russian aggression, it’s likely to keep giving a tailwind to defence contractors. However, with Trump extracting commitments to buy more US hardware from European leaders, it’s giving American contractors the edge. Shares in Northrup Grumman and Lockheed Martin edged up, while BAE Systems and Germany’s Rheinmetall have fallen back in early trade. Oil prices have dropped a little as a deal edges closer, given that it’s likely to lead to an easing of sanctions on Russia energy imports, increasing supplies on global markets. The threat of further barriers to trade with Moscow is still hovering over proceedings, with the next step expected to be a meeting between Zelensky and Putin.
UK borrowing costs remain elevated, as investors assess the government’s spending commitments including its defence pledges. At 5.61%, the yield on 30-year gilts is close to a 27-year high and has already surpassed the level hit in April amid volatile markets sparked by Trump’s radical tariffs threats. While the government is relying more on shorter-dated debt to fund its borrowing, it’s still a measure of uneasy sentiment about the state of the public finances. It’s also driven by market expectations for the path of monetary policy ahead. Another interest rate cut is not being priced in fully until March 2026. While there’s a fifty-fifty chance of a cut in December, investors are wary given the tone of caution struck by policymakers at the last meeting. July’s inflation snapshot is out tomorrow, and the CPI reading is set to creep higher from 3.6% in June, to potentially 3.8%. The Bank of England has forecast inflation will peak at 4% in September before finally retreating. It seems borrowers will need more patience and will have to dig deep to deal with expensive loans for many more months to come.
There are few triggers expected to move markets significantly in the days ahead, with US futures pointing to a lower open for the S&P 500. There’s a wait-and-see mood percolating ahead of the Jackson Hole central bankers’ symposium, which is expected to help illuminate the path ahead for interest rate cuts in the US. Attendees are also set to discuss big challenges in labour markets, especially with the major crackdown on immigration in the States, which is limiting the numbers of workers available, increasing costs for companies. Ageing populations in Western nations are also a growing challenge, adding to the burden for younger workers. UK pensioners set to make up a quarter of the population by 2075 according to a government-commissioned independent report. 19.5 million are expected to be eligible for a state pension by then, adding more pressure to government budgets. It will reopen the debate about the making people wait even longer for retirement but given it’s such a hot political potato it seems unlikely there will be more changes to the pensionable age any time soon.
Miner BHP has posted weaker profits amid cyclical challenges, but a more upbeat outlook and the dividend provided some cheer, pushing shares higher in early trade. With more here’s Matt Britzman, senior equity analyst, Hargreaves Lansdown:
“Mining giant BHP saw profits fall to a 5-year low, as softer iron ore prices weighed on the bottom line. But riding the commodity price wave is part and parcel of being a global miner, and considering where we are in the cycle, performance has been solid. Chinese iron ore demand has remained relatively robust, but a general shift to more protectionist trade policies in Western countries is expected to put prices under pressure over the near term.
What sets BHP apart is its enviable cost base. Its Australian operations deliver ultra-low-cost production, giving it a competitive edge even when prices falter. Meanwhile, the group is steadily ramping up its exposure to copper – a metal with lingering tariff risks but a compelling long-term demand story.
Management struck an optimistic chord on the broader commodity outlook, underscored by a hike in the dividend payout ratio and a more flexible approach to debt. It’s a signal of confidence, not just in the balance sheet, but in the future of the business.”