FTSE 100 struggles as UK borrowing soars while Wall Street hits new highs​​​​

UK budget deficit sends shockwaves through markets

The United Kingdom’s (UK) public finances delivered an unwelcome surprise in August, with borrowing hitting £18 billion against forecasts of just £12.8 billion. This represents the highest August borrowing figure in five years, immediately putting pressure on government finances and market confidence.

Year-to-date borrowing now sits £11.4 billion above Office for Budget Responsibility (OBR) projections, raising serious questions about fiscal sustainability. The overshoot was driven by multiple factors including inflation-related spending increases and soaring debt interest costs.

Government departments saw spending rise by £3.7 billion due to inflation adjustments, while benefit payments increased by £1.1 billion. Most striking was the jump in debt interest costs to £8.4 billion from £1.9 billion in the previous year.

This fiscal deterioration comes at a challenging time for the UK economy, with markets already concerned about persistent inflation. The borrowing overshoot suggests the government has less fiscal headroom than previously anticipated, potentially limiting future policy options.

Sterling weakens as borrowing data disappoints investors

The British pound immediately felt the impact of the disappointing borrowing figures, falling below $1.35 to its weakest level since early August. Sterling became the worst performer among Group of Ten (G10) currencies as investors reassessed the UK’s fiscal position and economic outlook.

UK government bonds also underperformed international peers, with 30-year gilt yields rising 4 basis points (bp). This movement reflects investor concerns about the sustainability of current borrowing levels and potential implications for future monetary policy.

The currency weakness compounds existing challenges for UK households already facing elevated import costs. A weaker pound typically translates to higher prices for imported goods, potentially adding to inflationary pressures.

Wall Street celebrates record highs despite global concerns

While UK markets struggled, United States (US) equities delivered stellar performance with the S&P 500, Nasdaq 100, and Dow Jones all closing at record highs. This remarkable strength extended gains following the Federal Reserve’s (Fed) recent interest rate cut, demonstrating the power of monetary policy support.

The rally was broad-based but particularly evident in technology stocks, with the sector benefiting from both lower rates and specific company developments. Small-cap stocks also participated strongly, with the Russell 2000 reaching its first record high since 2023.

Lower interest rates create a more favourable environment for growth stocks by reducing the discount rate applied to future earnings. This technical factor helps explain why technology companies have led the market higher despite global economic uncertainties.

The contrast between US and UK market performance highlights how different economic narratives can drive divergent outcomes. While the UK grapples with fiscal challenges, the US appears to be managing its economic transition more successfully.

Technology sector leads US market surge

Intel delivered the standout performance with a remarkable 22.8% surge, marking its biggest single-day gain since 1987. The catalyst was news that NVIDIA would invest $5 billion in the struggling chipmaker, providing a much-needed vote of confidence.

Nvidia itself gained 3.5%, further boosting the broader semiconductor index by 3.6%. The technology sector as a whole rose 1.36%, demonstrating how individual stock movements can drive sector-wide momentum.

This technology leadership reflects ongoing optimism about artificial intelligence (AI) and semiconductor demand despite recent concerns about valuations. The Nvidia investment in Intel suggests consolidation and strategic partnerships may reshape the industry landscape.

Retail sales provide mixed signals for UK economy

UK retail sales delivered some welcome positive news, rising 0.5% in August and 0.7% year-on-year (YoY), both above expectations. Clothing, food, and online retailers particularly benefited from warm weather conditions that encouraged consumer spending.

However, beneath these headline figures lie concerning trends about consumer behaviour and confidence. The Growth from Knowledge (GfK) consumer confidence survey revealed that households are saving less while becoming increasingly reluctant to make big-ticket purchases.

Higher costs for food and essential items continue to squeeze household budgets, forcing consumers to prioritise necessities over discretionary spending. This shift in spending patterns could have implications for different retail sectors and related investments.

The mixed retail picture reflects the broader economic challenges facing the UK economy. While some resilience remains, underlying pressures suggest consumers may struggle to sustain spending growth without income improvements.

Central bank policy creates divergent market paths

The Bank of Japan's (BoJ) decision to hold interest rates while signalling a more hawkish stance added another layer of complexity to global markets. Japanese yields rose on the news, with ripple effects spreading through European and other international markets.

Meanwhile, the Fed's recent rate cut continues to support US equity markets and risk sentiment. This policy divergence between major central banks creates both opportunities and challenges for global investors and traders.

US jobless claims fell last week, though overall labour market conditions remain relatively soft. Markets are currently pricing in around 44 bp of additional Fed cuts by year-end, suggesting continued monetary support.