London close: Stocks lower amid surge in gilt yields

(Sharecast News) - London stocks closed lower on Tuesday as rising borrowing costs and a sharp fall in sterling weighed on sentiment. The FTSE 100 index slipped 0.87% to 9,116.69 points, while the FTSE 250 dropped 2.18% to 21,162.89 points.

Sterling also slumped, falling 1.17% on the dollar to trade at $1.3386, and sliding 0.72% against the euro to €1.1483.

Russ Mould, investment director at AJ Bell, noted that tobacco, utilities and banks were "acting as a drag on the UK index, failing to offset strength in energy and healthcare."

UK bond yields surge amid fresh political uncertainty

UK government bond yields surged to multi-decade highs on Tuesday, while European yields also climbed and sterling slid sharply, as political uncertainty and fiscal concerns unsettled markets.

The 30-year gilt yield jumped to 5.71%, its highest level since 1998, following Monday's surprise cabinet reshuffle.

Kathleen Brooks, research director at XTB, said the spike in UK yields likely reflected "a delayed reaction to the government reshuffle," with investors uneasy about a "strategy void" on the economy as borrowing costs mount.

She noted that markets may also fear chancellor Rachel Reeves was being "managed out," recalling that yields spiked when her position was last seen as under threat in July.

Mould agreed, warning that "pressure continues to build on chancellor Rachel Reeves ahead of the upcoming Budget as the yield on the 30-year gilt hits its highest level since 1998 at 5.7% - reflecting concern about the UK's public finances and economic policy."

Neil Wilson, investor strategist at Saxo UK, added: "Long-dated gilt yields are now trading close to 27-year highs again with the 30-year above 5.7%.

"30-year yields at their highest in almost three decades is not a good look for the Labour government and underscores that there is little fiscal or economic credibility left."

The sell-off was not confined to the UK - yields on long-dated German, French and Dutch bonds hit their highest levels since the eurozone debt crisis in 2011, as traders focused on rising debt burdens and political tensions, including an upcoming no-confidence vote in France.

Patrick Munnelly at TickMill highlighted that "at the heart of the issue in next week's confidence vote on the French government is the proposed €44bn of budget savings put forward by PM Bayrou," noting that equated to around £38bn and "is not out of the realm of the potential scale of the fiscal challenge the OBR will present Reeves with for the UK's Autumn Budget."

Across the Atlantic, US economic data pointed in a different direction.

The S&P Global manufacturing PMI rose to 53.0 in August, the fastest pace of growth since May 2022, driven by new orders, rising inventories and renewed hiring.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said manufacturing was "running hot over the summer" and was "on course to provide a boost to the US economy in the third quarter," although he warned that tariff-linked cost pressures were pushing up prices.

Munnelly said investors were now "preparing for a jobs report from the US on Friday, which will impact the Federal Reserve's short-term policy decisions," adding that "there is a widespread expectation of a 25 basis-point rate cut during the September meeting" amid growing political pressure on the Fed.

US construction spending, however, weakened further, falling 0.1% in July for a ninth consecutive monthly decline.

The drop was led by a 0.5% fall in non-residential building, though residential construction edged 0.1% higher.

Spending was down 2.8% year-on-year, underscoring continued weakness in the sector.

Retailers on the slide, gold miners rise again

On London's equity markets, retailers were among the decliners, with Marks & Spencer down 3.95%, Dunelm off 3.85% and B&M European Value Retail sliding 4.61%, as the sector came under broad pressure.

Centrica fell 2.66% even after announcing that two UK nuclear power stations in which it holds a 20% stake - Heysham 1 and Hartlepool - would remain operational until March 2028, a year longer than planned.

Mould noted that "Centrica shares powered down despite news that two nuclear power plants in which it has a 20% stake will see their lives extended by one year to boost the UK's energy security," adding there may be "disappointment at the lack of an extension to the expected March 2030 closure date of two of its other nuclear plants, Heysham 2 and Torness."

British American Tobacco lost 1.59% after RBC Capital Markets cut its rating to 'underperform', warning that profit expectations for its new categories division were "seriously overblown."

Housebuilders also weakened, with Taylor Wimpey dropping 3.19% after a downgrade to 'neutral' at Bank of America.

Barratt Redrow, Persimmon and Berkeley Group fell 2.67%, 3.35% and 2.22%, respectively.

Ithaca Energy plunged 13.26% after major shareholders Delek and Eni sold just over 49.6m shares in a placing.

Oxford Nanopore Technologies tumbled 12.79%, despite reporting a 25.6% jump in first-half revenues to £105.6m and stronger growth across all regions, as it reaffirmed its full-year outlook.

On the upside, precious metals miners Fresnillo and Hochschild Mining gained 5.15% and 2.4%, respectively, as gold prices hit fresh record highs.

Mould observed that "once again in 2025 gold prices have hit new record highs - reflecting the uncertain and volatile backdrop seen this year," while Munnelly said the move came as "speculators anticipated the Federal Reserve to reduce interest rates this month."

Unilever rose 1.37%, with investors favouring its defensive qualities, while Harbour Energy edged 0.09% higher after JPMorgan initiated coverage at 'overweight', citing cost reductions, free cash flow resilience and balance sheet strength.

Reporting by Josh White for Sharecast.com.