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Housing, Retail And Hospitality Stay Weak But Energy And Defence Gain On Truss Win

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  • Weakness persists for inflation hit stocks after Truss becomes Prime Minister
  • Worries tax cuts will lead to higher interest rates sees housing shares decline further
  • Supermarkets remain under pressure as imports are set to stay expensive due to the weak pound
  • Banking shares slid amid the bleak outlook for the UK economy
  • Defence stocks gain amid expectations of higher military spending
  • Energy stocks boosted by higher oil price and expectations of no fresh windfall tax

Liz Truss Becomes UK’s New Prime Minister

The new Prime Minister’s in-tray is overflowing with problems marked urgent, but none is more pressing than the cost-of-living catastrophe facing companies and consumers.

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Expectations that a Trussenomics solution will be found by slashing taxes and spending big is fuelling worries that inflation will not easily be brought under control and that the Bank of England will be forced to keep raising rates and keep them elevated for longer.

Truss and her preferred candidate for Chancellor, Kwasi Kwarteng, are much more relaxed about higher levels of borrowing than their predecessors and that continues to cause jitters in financial markets.

The pound is still hovering near 2.5 year lows at $1.148 while the yields on UK 10 year government debt are little changed at 2.93%.

Yields have registered the biggest monthly rise since 1986 as Liz Truss hurtled towards Downing Street, throwing out promises of slash and spend on the campaign trail, which threaten to cause fresh problems for UK economy.

The weaker pound makes imports more expensive and with no immediate solution ahead to the painful rises in costs and the terrible squeeze on households’ budgets, supermarkets are under pressure.

Ocado Group PLC (LON:OCDO) in the FTSE 100 dropped by 2.7% and both Tesco PLC (LON:TSCO) and J Sainsbury plc (LON:SBRY) also fell back. Despite expectations of a cut to VAT to help struggling firms, the bleak outlook for the UK economy has kept the hospitality sector in the red.

As well as fears consumers will be strapped for cash in the months to come, soaring gas prices add more pain for companies, who are waiting in limbo for a package of support to be unveiled.

The Restaurant Group PLC (LON:RTN), the owner of Wagamama, fell by 4%, J D Wetherspoon plc (LON:JDW) dropped by 2% and Whitbread fell by1%.

Weakness In Housing Stocks

Weakness is persisting for housing stocks, given worries that mortgage repayments will become unaffordable for homeowners who were lulled into a false sense of security during the era of cheap money.

Rightmove Plc (LON:RMV) was down by more than 2% in the FTSE 100 while Barratt Developments PLC (LON:BDEV) and Persimmon plc (LON:PSN) slid further into the red.

Although higher interest rates will boost the net income margins for banks, a deteriorating economy could spell bad news in terms of demand for loans and worries are also increasing about the potential of bad debts mounting up as a recession looms.

Unless there is a lifeline of support issued to help companies withstand the painful hikes in energy costs, its feared many will go to the wall. Lloyds Banking Group PLC (LON:LLOY) shares have fallen by 1.4% and Barclays by 1.7%.

The new Prime Minister’s commitment to spending more on defence by upping the budget to 3% of GDP has boosted the sector, with BAE systems extending gains in early trade following news of her announcement.

She is likely to take up the baton from Boris Johnson in his dedicated support for Ukraine and is likely to clamour for more support in terms of military hardware from European nations.

Her expressed distaste for a further windfall tax on the oil and gas sector will have added to the strength of energy giants today, which had already been boosted by the ratcheting higher of gas prices and the march back upwards of crude prices over supply constraints.

BP plc (LON:BP) and Shell PLC (LON:SHEL) were among the biggest climbers on the FTSE 100, while Harbour Energy in the FTSE 250 also gained more than 3%.

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown