The announcement of John Healey as the new UK Chancellor has sent shockwaves through the defence sector, with shares in major contractors surging by up to 7% on Tuesday. The FTSE 100's Babcock International, BAE Systems and Rolls-Royce all saw significant gains, while QinetiQ, a leading defence technology firm listed on the FTSE 250, rose almost 4%. This market reaction is driven by speculation that Healey will use his new role to bolster defence spending, possibly through innovative borrowing mechanisms such as 'war bonds', which he has previously championed.
Healey's appointment comes just weeks after his resignation from the previous government over disagreements on defence investment. As a vocal advocate for increased spending, he had deemed the existing plan inadequate for national security. However, analysts have tempered expectations of an immediate and substantial cash injection into defence. IG's Chris Beauchamp notes that as Chancellor, Healey will need to balance competing demands across government, rather than solely focusing on the Ministry of Defence's needs. While his experience makes him a logical choice, finding significant additional funds for defence will be challenging amidst other broad spending commitments.
UK government bonds remain relatively stable, with the yield on the 10-year gilt decreasing by about one basis point to 5.03%, although still above the critical 5% mark. Sterling has seen a slight uptick against the US dollar as investors monitor Prime Minister Burnham's fiscal approach. The recent comments on utilising 'flexibility' in fiscal rules to boost public investment have been interpreted as a signal for higher borrowing.
The UK government's June borrowing figures, released on Tuesday, showed a lower-than-expected amount, providing some relief to the gilt market. Concurrently, plans were unveiled to cut household electricity bills by an average of £45 annually from October, at a cost of £850 million this financial year. Long-term initiatives to address living costs, including potential reductions in bus fare caps and temporary private sector rent freezes, are expected to be outlined by Chancellor Healey in the upcoming budget.