Bond markets remain fragile after global selloff
Gilt yields held steady but remained elevated following yesterday’s sharp selloff across global debt markets. Traders are reassessing expectations for 2026 rate cuts, with the repricing creating an uncomfortable backdrop for risk assets.
The move reflects growing doubts about how aggressive central banks can be in easing policy. Sticky inflation and resilient growth have forced investors to reconsider the dovish narrative that dominated much of last year’s thinking.
For UK bonds and rates specifically, the challenge is compounded by fiscal pressures. The government’s spending plans leave little room for error, and any disappointment on growth could see yields push higher still.
The fragility in bond markets matters for equities too. Higher yields make defensive sectors less attractive and increase the discount rate applied to future earnings. That creates headwinds for richly valued growth stocks in particular.
FTSE 100 slips as BAT drags on tobacco concerns
The FTSE 100 edged lower as British American Tobacco (BAT) dropped around 4% following its trading update. Broker concerns over margin pressure weighed on sentiment, with analysts questioning whether the company can maintain profitability amid shifting consumer preferences.
BAT’s struggles highlight the challenges facing traditional tobacco companies. The shift to reduced-risk products is accelerating, but the economics remain less attractive than the legacy cigarette business. That leaves the dividend under scrutiny.
The tobacco giant’s weakness dragged on the broader index, given its significant weighting. Defensive sectors have struggled recently as bond yields rise, with investors rotating towards more cyclical areas of the market.
Retail sales data signals consumer caution ahead
November retail sales growth slowed to 1.4%, signalling consumer caution ahead of the budget. The deceleration reinforces a mixed domestic backdrop, with households pulling back on discretionary spending.
The slowdown comes despite a strong labour market and wage growth. It suggests consumers are anticipating tougher times ahead, whether from tax rises or broader economic uncertainty. That cautious behaviour could become self-fulfilling if it persists.
Retailers face a particularly challenging environment. Costs remain elevated while pricing power is limited by fragile consumer confidence. The combination squeezes margins and makes it harder to deliver earnings growth.
The data complicates the Bank of England’s (BoE) job. Weak consumer spending argues for faster rate cuts, but inflation remains above target. That leaves policymakers stuck between competing priorities.
Mid-caps gain on corporate updates and earnings upgrades
Several mid-cap names enjoyed strong gains on the back of positive corporate updates. Applied Nutrition and Moonpig both rose after earnings upgrades and stronger trading momentum, demonstrating that stock-picking opportunities remain despite the subdued broader market.
Applied Nutrition’s performance reflects growing demand for sports nutrition products. The company has carved out a niche in a competitive market, and its ability to exceed expectations suggests the growth story remains intact.
Moonpig’s gains come as the online greeting card and gift platform continues to benefit from the shift to digital commerce. The company has successfully defended its market position against new entrants, supporting margin expansion.
Defence stocks rally on German equipment orders
Defence names firmed after Germany approved a record €52bn in equipment orders. The massive spending commitment helped sentiment across European aerospace and defence stocks, reinforcing the sector’s structural tailwinds.
Germany’s move reflects a broader European shift towards higher defence spending. Russia’s invasion of Ukraine fundamentally changed the political calculus, making defence budgets politically untouchable in a way they haven’t been for decades.
The UK’s BAE Systems and others are well-positioned to benefit from this multi-year spending cycle. Order books are filling up, providing revenue visibility that few other sectors can match in the current environment.
Pharma dealmaking highlights AI-driven drug discovery
Novartis agreed to pay up to $1.7bn for UK biotech Relation Therapeutics to support AI-driven drug discovery. The deal highlights the pharmaceutical industry’s growing focus on artificial intelligence (AI) to accelerate development timelines and reduce costs.
AI promises to transform drug discovery by identifying promising compounds faster and more efficiently than traditional methods. The technology can analyse vast datasets to predict which molecules are most likely to succeed in clinical trials.
For UK biotech firms, this creates a potential exit route and validates the investment thesis around computational approaches. It also demonstrates that European companies can compete globally in cutting-edge technology sectors.
The premium paid suggests pharma giants are willing to bet heavily on AI capabilities. Whether these investments deliver returns remains uncertain, but the sector’s commitment to the technology is clear.
Ashtead maintains guidance despite softer quarterly profit
Ashtead reported softer quarterly profit due to lower hurricane activity, which reduced emergency equipment rental demand. Despite the near-term weakness, the company maintained its full-year guidance and announced a $1.5bn buyback tied to its New York Stock Exchange (NYSE) relisting.
The hurricane impact was a one-off headwind that masked underlying business strength. Construction activity remains robust in key markets, supporting demand for the equipment rental services that drive Ashtead’s core business.
The buyback announcement signals management confidence in the outlook. Returning capital to shareholders through repurchases typically indicates that executives believe the shares are undervalued relative to intrinsic worth.
The NYSE relisting is strategically important, given that most of Ashtead’s operations are now in the United States. A primary US listing should improve liquidity and potentially support a higher valuation multiple.
Bank of England’s Taylor reinforces gradual easing path
BoE policymaker Alan Taylor said policy remains restrictive but inflation progress means the bank is closer to its target. The comments reinforce expectations of gradual easing rather than aggressive cuts.
Taylor’s message suggests the BoE is comfortable with its current pace of policy adjustment. While rates will come down over time, there’s no urgency to accelerate the process given economic resilience.
This measured approach contrasts with market hopes earlier in the year for more aggressive easing. The repricing of rate expectations has been a key driver of bond market weakness and creates headwinds for equities.
European equities flat ahead of Fed decision
European stocks traded flat ahead of the Federal Reserve (Fed) meeting, with investors reluctant to take strong positions before the policy decision. Financials and industrials outperformed, with BNP Paribas among the early gainers.
The muted price action reflects uncertainty about what the Fed will signal on future rate cuts. Markets have priced in a 25bp reduction, but the real question is how many more cuts follow in 2026.
Financials have held up better than other sectors, benefiting from higher bond yields that support net interest margins. Industrials are gaining on expectations that easier policy will support economic growth next year.
Nvidia gains on Trump chip export comments
Nvidia shares edged higher after President Trump said H200 AI chips can be exported to China with a 25% fee, despite strong pushback from US lawmakers. The comments eased concerns about tighter export restrictions damaging the company’s growth prospects.
The proposed fee structure represents a compromise between national security concerns and commercial interests. It allows Nvidia to access the Chinese market while addressing worries about advanced chip technology being used for military purposes.
However, the strong opposition from lawmakers suggests this isn’t settled policy. Congress could still move to tighten restrictions further, creating ongoing uncertainty for semiconductor companies with significant China exposure.
What this means for traders
Markets are treading water ahead of the Fed decision, with bond market fragility creating an uncomfortable backdrop. The repricing of rate cut expectations has further to run if central banks continue signalling caution.
Stock-specific opportunities remain despite the subdued index performance. The divergence between BAT’s weakness and mid-cap strength demonstrates that careful selection matters more than broad market timing.
Defence stocks continue to benefit from structural tailwinds, though recent gains mean the risk-reward has deteriorated. New buyers should be wary of chasing momentum in an already crowded trade.
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