UK markets digest Reeves's cautious fiscal message

​​​Reeves strikes a careful balance

​Rachel Reeves struck a careful balance in her Downing Street speech, emphasising fiscal discipline whilst declining to rule out tax rises. Markets took this as a sign that the government remains committed to keeping the public finances under control, even if it means tough choices ahead. The Chancellor's focus on productivity and "growth with fairness" offered little in the way of concrete policy detail, but the broad message was clear enough.

​Gilts rallied on the back of her comments, with 30-year yields dropping around 4 basis points as investors interpreted the speech as fiscally cautious. The initial relief was palpable, though as is often the case with political speeches, the lack of specifics meant the rally faded somewhat as the day wore on. Markets wanted more meat on the bones.

​The British pound wasn't quite so impressed, falling 0.5% against the US dollar to around $1.31, its lowest level since April. Sterling has been under pressure for a while now, and Reeves's refusal to rule out further tax rises hasn't done much to inspire confidence. When you couple that with a resurgent dollar, helped along by mixed remarks from Federal Reserve (Fed) officials, it's no surprise that cable continues to drift lower.

​The FTSE 100 fell around 1.1%, though in fairness it was simply tracking broader European weakness rather than reacting to anything UK-specific. The index's defensive makeup—packed with miners, energy stocks and pharma—helped limit the damage compared to some of its peers.

​Bank of England rate cut bets on the rise

​Traders have been increasing their wagers on Bank of England (BoE) easing, with a 28% chance now priced in for a cut this week and 68% by year-end. This shift reflects concerns about growth momentum and the impact of tight monetary policy on the UK economy. The BoE has been cautious about cutting too soon, wary of rekindling inflation, but market pricing suggests patience is wearing thin.

​The combination of weaker sterling and falling gilt yields creates an interesting backdrop for the BoE's next move. On one hand, lower bond yields give the central bank more room to ease. On the other, a weaker pound could stoke imported inflation, potentially constraining their ability to cut rates aggressively. It's a delicate balancing act.

​Interest rate expectations are being shaped not just by UK data, but by the broader global picture. The Fed's mixed messaging has left markets uncertain about the path of US rates, which in turn influences what the BoE can do. Central banks don't operate in isolation, and the dollar's recent strength is a reminder of that interconnectedness.

​For now, the market is positioning for gradual easing rather than anything dramatic. The BoE will want to see more evidence that inflation is truly under control before embarking on a sustained cutting cycle. But with growth concerns mounting and political pressure building, the direction of travel seems clear enough.

​Budget promises and business rates reform

​Reeves promised a budget focused on fairness and investment, including reforms to business rates to reflect the digital economy. This is long overdue - the current system penalises bricks-and-mortar retailers whilst online-only businesses escape relatively lightly. But the devil will be in the detail, and we won't know what this actually means until the autumn budget arrives.

​The Chancellor's emphasis on productivity as the key to growth is hard to argue with, but it's also somewhat vague. Productivity improvements don't happen overnight, and they require investment in infrastructure, skills, and technology. Without specific measures to drive these improvements, it's just rhetoric.

​Markets are sceptical about political promises, and rightly so. We've heard variations of these themes from multiple chancellors over the years, yet UK productivity growth remains stubbornly weak. What matters is execution, not aspiration, and that's what investors will be watching for in the coming months.

​The lack of detail in yesterday's speech means we're none the wiser about what's actually coming in the budget. Will there be tax rises? Which taxes? How much? These questions remain unanswered, leaving businesses and investors in limbo. Uncertainty is rarely helpful for market sentiment.

​Corporate updates provide some positive news

BP delivered a pleasant surprise, beating profit expectations despite the challenging environment for energy companies. The oil major reaffirmed its commitment to $4 billion in divestments, showing that management remains focused on portfolio optimisation and balance sheet strength. The BP share price has struggled to make meaningful progress this year, but results like these at least provide a foundation for stability.

​AB Foods announced it's reviewing a potential separation of Primark, its discount fashion chain. This is the sort of corporate action that can unlock value, as Primark operates in a very different part of the market to AB Foods' sugar and ingredients divisions. Whether it actually happens remains to be seen, but the review itself suggests management is thinking creatively about structure.

​These corporate developments stand out against an otherwise downbeat backdrop. When broader market sentiment is weak, company-specific news becomes more important for individual share performance. Investors are looking for stories that can buck the trend, and both BP and AB Foods have provided at least some food for thought.

​Global risk appetite remains subdued

​European equities sold off across the board, with the UK simply following the continental lead. Concerns about growth, stretched tech valuations, and uncertain monetary policy have combined to create a cautious mood. When risk appetite is this fragile, it doesn't take much to push markets lower. A lack of positive catalysts is often enough.

​The dollar's continued strength is adding to the pressure, particularly for commodity producers and companies with significant overseas earnings. A strong greenback tends to weigh on risk assets, as it makes dollar-denominated commodities more expensive and reduces the value of foreign earnings when translated back into dollars. For the FTSE 100, with its heavy weighting towards miners and energy stocks, this is a headwind.

​Trading volumes have been relatively light, suggesting many participants are content to sit on the sidelines for now. This lack of conviction means markets can drift lower without any obvious catalyst, simply because there aren't enough buyers to absorb selling pressure. It's a frustrating environment for bulls who are waiting for a catalyst to drive a sustained rally.