London - British equities edged down on Friday as better-than-expected retail sales in May failed to drown out a significant public borrowing surprise and a political upset that raised questions about Labour leadership stability. Market participants were also monitoring fresh tensions around a fragile U.S.-Iran deal and related developments in the Middle East.
The Office for National Statistics reported retail sales volumes rose 1.2% in May, ahead of the 0.5% consensus estimate and recovering from a 1.0% decline in April. On an annual basis, volumes increased 3.2%, stronger than the 1.9% figure economists had been expecting.
Despite the upside in consumer spending, the upbeat data was largely overshadowed by public finances figures showing a substantial borrowing miss. Public sector net borrowing reached £23.3 billion in May - the second highest May reading on record - and exceeded the Office for Budget Responsibility’s projection by £5.6 billion. Cumulative borrowing for the financial year to May now totals £46.3 billion, running £7.7 billion ahead of official forecasts.
Debt interest costs also jumped to a record £11.7 billion in May, a rise of 54.4% compared with a year earlier, as index-linked gilt expenses were pushed higher by rising retail prices. Net debt rose to 95.1% of GDP, a ratio the data notes was last observed in the early 1960s.
On the markets, the FTSE 100 underperformed peers on the Continent. By 03:20 ET (07:20 GMT) the FTSE 100 had slipped 0.12%. Germany’s DAX and France’s CAC 40 meanwhile moved higher, up 0.15% and 0.08% respectively over the same interval. Sterling weakened modestly, trading down 0.06% at $1.3197 against the dollar as investors priced in rising prospects of a Labour Party leadership contest.
The political backdrop was sharpened by the Makerfield parliamentary by-election, where Andy Burnham - the Greater Manchester mayor and described in the results as Labour’s most popular politician - secured the seat with 54.8% of the vote. Reform UK finished second with 34.5%. Burnham’s win gives him the parliamentary foothold to trigger or contest a leadership challenge against Sir Keir Starmer, who has stated he intends to face the contest.
International developments added to investor caution. Planned talks in Switzerland surrounding the U.S.-Iran agreement were postponed and a participant identified as Vance withdrew from negotiations, clouding prospects for a timely resolution. Reports of overnight strikes that reportedly killed at least 16 people and public criticism of Israel’s military actions in Lebanon were cited as factors complicating diplomacy. Separately, Iran announced the creation of a new authority to manage shipping through the Strait of Hormuz, pledging to maintain traffic and to waive transit fees for 60 days while U.S. efforts continue to seek reopening without tolls.
Commodity markets reflected the regional tensions. U.S. West Texas Intermediate crude rose 1.1% to $77.42 per barrel and Brent crude climbed 0.41% to $80.18. Precious metals moved in the opposite direction as safe-haven demand eased: spot gold fell 1.3% and gold futures dropped 1.7%.
In company news in the U.K., PPHE Hotel Group said a £920.9 million takeover offer from Fattal Hotel Group is no longer workable after opposition from a major shareholder. PPHE said it will continue a strategic review amid a new preliminary offer. Homebuilder Barratt Redrow named former Britvic finance chief Rebecca Napier as its new chief financial officer, with the appointment effective August 3, as the builder navigates cost pressures and softer housing demand.
Overall, Friday’s session highlighted a divergence between underlying economic data and market sensitivities to fiscal and political risks. Stronger retail spending suggested resilience in consumer activity, but the size of the borrowing miss and the sudden political developments limited the rally potential for U.K. stocks and kept investors cautious across asset classes.