London's equity markets opened modestly higher on Friday, with the FTSE 100 advancing 0.37% to 10,481.88 in early trading. The broader FTSE 250 index also recorded gains, rising 0.52% to 23,067.19. The uptick was driven by strength in select blue-chip stocks, notably BT Group, Compass Group, and 3i Group, which posted gains of 3.74%, 2.60%, and 2.27% respectively. On the downside, shares of ConvaTec, BP, and Barratt Redlow edged lower.
The positive start came amid cautious optimism surrounding geopolitical developments, as reports of progress in U.S.-Iran negotiations lifted European markets. The pan-European STOXX 600 index rose 0.5% to 623.79, while Germany's DAX added 0.7%. However, Reuters noted that key sticking points remain, including Iran's uranium enrichment levels and control over the Strait of Hormuz, a vital energy shipping route.
Despite the early gains, sentiment was tempered by the release of weaker-than-expected UK economic data. Retail sales volumes in April fell by 1.3% month-on-month, marking the steepest decline in nearly a year and significantly undershooting economists' forecast of a 0.6% drop, according to a Reuters poll. Fuel sales slipped after a surge in stockpiling in March. Year-on-year, April sales were flat. Samuel Edwards at Ebury commented that cost-of-living pressures stemming from the Iran conflict, higher mortgage rates, and household budget constraints are "weighing heavily on consumer confidence."
Further dampening the mood, the Office for National Statistics reported that UK public sector borrowing reached £24.3 billion in April, an increase of £4.9 billion from the same period last year and £3.4 billion above the Office for Budget Responsibility's forecast. Debt interest payments soared to £10.3 billion, the highest April figure on record without adjusting for inflation. Ruth Gregory at Capital Economics described the public finances as "fragile," while Rob Wood, chief UK economist at Pantheon Macroeconomics, warned that "tax hikes to fund spending plans could undermine growth."
The gilt market remained under scrutiny, with rising UK government bond yields increasing government borrowing costs and potentially pressuring equity valuations, particularly for rate-sensitive sectors such as homebuilders and retailers. Thursday's S&P Global flash UK Composite PMI for May fell to 48.5, down from 52.6 in April, slipping below the 50 threshold that separates expansion from contraction for the first time since April last year. Chris Williamson, chief business economist at S&P Global Market Intelligence, described the situation as a "perfect storm," with political uncertainty and fallout from the Middle East conflict weighing on firms. Companies surveyed reported "falling output, surging inflation, supply shortages and job cuts."
The divergence in market performance between internationally-focused and domestic stocks remains notable. Large-cap companies with significant overseas earnings, along with a handful of defensive names, continue to find support as long as global risk appetite holds, the pound remains weak, and hopes for a diplomatic resolution in the Middle East persist. Conversely, domestically oriented stocks face ongoing headwinds if consumer spending weakens further. Friday's bounce could prove short-lived, as a breakdown in Iran talks, a spike in oil prices, or renewed upward pressure on gilt yields could quickly reverse gains. Investors are also wary of the potential for further weak UK data, which may force them to price in slower growth alongside tighter fiscal measures.
