Shares in defence companies surged on Tuesday after Andy Burnham appointed John Healey as chancellor, sparking investor hopes of increased spending on military suppliers. Babcock International rose 7%, BAE Systems climbed 3%, and Rolls-Royce gained nearly 2% on the FTSE 100, while QinetiQ advanced almost 4% on the FTSE 250.
Market reaction to Healey's appointment
The former defence secretary was named chancellor after markets closed on Monday. Investors anticipate Healey may boost defence spending, potentially through issuing 'war bonds', a form of borrowing allocated solely for the military that he has previously advocated. Healey resigned last month over a dispute with Keir Starmer and Rachel Reeves, accusing them of jeopardising national security with inadequate investment plans.
However, Chris Beauchamp, chief market analyst at broker IG, cautioned that Healey's appointment may not yield immediate gains for defence. 'As chancellor, he will have many competing demands, and won't just be the MoD's man in No 11,' Beauchamp said. 'His experience made him an obvious candidate, but it will not be easy to find lots more cash for defence, especially when the new PM is so busy making broad spending commitments in other areas.'
Bond market and fiscal outlook
UK government bonds remained relatively steady, with the 10-year gilt yield dipping one basis point to 5.03%. Sterling edged up slightly against the dollar. Bond investors have been monitoring Burnham's statements, expecting a looser approach to public finances than under Starmer and Reeves. The new prime minister indicated on Monday he could consider 'flexibility' in fiscal rules to boost public investment, which some interpreted as a signal for higher borrowing.
Official data on Tuesday showed UK government borrowing was lower than expected in June, easing pressure on gilts. Separately, the government announced plans to cut household electricity bills by an average of £45 annually from October, costing an estimated £850 million this financial year. Healey is expected to outline further cost-of-living measures at the budget later this year, potentially including reducing the cap on bus fares and temporarily freezing private sector rents.
