FTSE 100: London's defence stocks buoyant as Wall Street's 'TACO trade' wavers

• FTSE 100 closes flat
• Defence stocks up as PM Starmer pledges to up defence spending
• UK mortgage approvals fell last month
• UK manufacturing PMIs not quite as bad as expected  

4:58pm: FTSE ends flat

The FTSE 100 ended flat on Monday at 8,774, after recovering from earlier losses driven by renewed global trade tensions.

Market sentiment was rattled by US President Trump's announcement to double tariffs on steel and aluminum imports, prompting warnings of retaliation from the EU and escalating friction with China, which denied US accusations of breaching a tariff agreement.

Hopes for a diplomatic breakthrough emerged as White House sources hinted at a possible call between Trump and China’s President Xi.

On the economic front, UK manufacturing declined less than expected in May, though key metrics like production and employment weakened, while house prices rose 3.5% year-on-year.

4pm: FTSE submarine resurfaces 

After taking a dive earlier in the afternoon, the FTSE 100 submarine has surfaced with land ahoy of the closing bell around half an hour away. 

Defence contractor Babcock remains top of the leaderboard, followed by a couple of precious metals miners. 

Anglo-American pest controller Rentokil Initial, British Airways owner IAG and life insurers L&G, M&G, Aviva and Phoenix Group are next, along with Schroders. 

3.26pm: Some small cap headlines   

The board of Frenkel Topping Group (AIM:FEN) are in talks with private equity group Harwood are in "advanced" talks about a possible cash offer at 50p a share, compared to a close price last week at 43p.

Shareholders would also remain entitled to receive the proposed final dividend of 1.375p, the statement said. 

Harwood, which already holds a stake of 29.96%, said it may only proceed with a full offer once it has carried out due diligence.

Shares in Alkemy Capital Investments also rose after it flagged major progress on its Tees Valley lithium project, including successful process validation, a firm $250 million capital budget, and improved financial forecasts.

Polarean Imaging PLC (AIM:POLX) gave its own a lift as it received expanded approval from the US regulator for its lung imaging agent to be used on young children.

Aura Energy Ltd (AIM:AURA) inked a collaboration agreement with Neu Horizon Uranium, including buying a minority stake and assisting with regulatory engagement and technical cooperation in Sweden, as the government there takes steps to lift its uranium mining ban.

2.46pm: Wall Street red light

US stocks have opened in the red, with the Dow Jones leading the decline, down 0.7% as 3M, Merck, Johnson & Johnson, Caterpillar and P&G shares march lower. 

The S&P 500 is down 0.5% and the Nasdaq has slid 0.3% lower. 

Topping the F&P leaderboard are Steel Dynamics and fellow steel producer Nuco, up 15.2% and 14.7%.

Back in London, the FTSE 100 has also stumbled in sympathy.   

2pm: FTSE reshuffle

The next FTSE index review will be announced on Wednesday, based on market closing prices tomorrow.

No changes are expected in FTSE 100, as all constituents rank above the relegation threshold, ie none of the 100 largest qualified companies on the London Stock Exchange have fallen outside the top 110 places in terms of market cap, and none from the FTSE 250 have climbed into the top 90 or above. 

Four companies are likely to be promoted from the small cap ranks into to FTSE 250, though: Gamma Communications (AIM:GAMA), Avon Technologies PLC (LSE:AVON), Wickes Group PLC (LSE:WIX), and Pantheon Infrastructure PLC (LSE:PINT).

Several mid caps stocks are are risk of dropping out of the FTSE 350, including National Express parent Mobico Group PLC (LSE:MCG), MyProtein shakes owner THG PLC (LSE:THG), and Ukrainian iron ore group Ferrexpo PLC (LSE:FXPO, based on current market capitalisations.

The index changes will become effective on Monday 23 June 2025.

1.31pm: TACO for lunch?

Are markets betting on the TACO trade today?

On one side, Friday's announcement from President Trump that he plans to double tariffs on steel and aluminium imports "does serve to push back on any hopes that he will change course in the face of the recent court ruling," said market analyst Josh Mahony at Rostro. 

On the other hand, investors are getting used to Trump's aggressive statements being rolled back, so much so that the "TACO" trade theory (standing for ‘Trump Always Chickens Out’, if you've not seen it before) is being much mentioned by traders and analysts today and even trending on social media.

"But there’s no guarantee that the US President won’t follow through with more onerous restrictions, given he’s stayed steadfast to his pledge to bring more manufacturing back to the US," says Susannah Streeter at HL.

The steel tariff would be a "big setback" for manufacturers around the world, including the high hopes for those in the UK that hoped for some stability following the US-UK trade deal.

"The fresh tariff pledges raise inflationary concerns in the US, given that around a quarter of steel [and] almost 60% of aluminium used in the States is imported, which will push up costs for manufacturers and the construction industry," Streeter adds. 

The falls for the US future are only small though, which suggstes many in the market are "clinging to the ‘TACO trade’", says Rupert Thompson, chief economist at IBOSS asset management, "betting that Trump's tough talk – despite his back-and-forth on European tariffs and rising tensions with China – won’t ultimately result in meaningful economic harm."

Chinese stocks were lower earlier amid fading hopes of a trade deal, says Joshua Mahony at Rostro, with the Trump administration claiming that China have continued to hold back rare earth exports despite the agreement reached in Geneva.

The Chinese commerce ministry, however, insisted that they have upheld their part of the agreement, "there is a fear that relations are deteriorating rather than improving". 

12.17pm: FTSE floating flat, while others in the red

The FTSE 100 has been like a submarine at periscope depth for most of the morning, lurking just below the waterline, thogh popping up occasionally as it has done now.

Gains for defence contractor Babcock and larger rival BAE Systems are helping with the index's buoyancy, on PM Starmer's defence pledges. 

Precious metals miners Fresnillo and Endeavour are also up there, along with insurers, oil companies and retailers. 

Creating the drag are falls for cyclicals like WPP, Ashtead, Diploma, Croda, Diageo and Standard Chartered.  Six of the four FTSE 100 top ten are in the red too. 

The major Continental European indices and US stock futures are lower too, between 0.3% and 5%.  

11.53am: Defence news mostly pretty much already in prices

Keir Starmer also confirmied plans to increase defence spending to 2.5% of GDP by 2027 and to 3% during the next parliamentary term, to support nuclear warhead modernisation, expand the submarine fleet, scale-up munitions production, and enhance investment in cyber and long-range strike capabilities.

This is all in line with the strategic trajectory previously set by the government, says analyst Loredana Muharremi at Morningstar.

"While the UK government believes these spending targets are sufficient to meet its national security objectives, they may still fall short of growing expectations from NATO and the US, with the Trump administration urging a faster path to 3% by 2029."

In terms of UK defence stocks, the spending plan is "unequivocally positive for the sector", says Muharremi, "though the impact will be gradual and backloaded".

The commitment to raise defence spending to 3% of GDP over the next decade "provides long-term visibility and reinforces political consensus around defence as a strategic priority – critical for de-risking investment and production ramp-ups."

As we have done below, Muharremi says BAE is a key beneficiary of the announcement as it is well-positioned across submarines, munitions, cyber and long-range weapons; as well as Rolls-Royce, through its role in naval nuclear propulsion.

"Also, a broader network of Tier 2 and Tier 3 suppliers in the UK industrial base should benefit from the localisation of munitions and components," she adds.

However, she says the news is "largely already incorporated into market expectations and consensus forecasts, so we don't expect to see much impact on the market pricing of UK defence stocks".

11.16am: Defence spending aimed at also boosting economy

Keir Starmer gave a speech in Scotland at the UK Strategic Command HQ.

Comments from the PM and his Defence Secretary, John Healey, suggested that the defence spending is being seen by the government as a Keynsian boost for the economy. 

The government sees the defence review as helping make defence "an engine for economic growth and boosting skilled jobs", Heakey said in a Ministry of Defence statement.

Lessons from Russia's invasion of Ukraine, he said, also have shown that "a military is only as strong as the industry that stands behind them". 

"We are strengthening the UK’s industrial base to better deter our adversaries and make the UK secure at home and strong abroad."

10.54am: Babcock surging after Starmer speech

Babcock International PLC (LSE:BAB) shares are up 6.5% now, as PM Keir Starmer says he wants to move the UK to "war-fighting readiness".

He says doing this is "the most effective way" to deter aggression.

The UK will build at least six new munitions factories, create a "hybrid" Royal Navy, blending drones with warships, submarines and aircraft, and invest £15 billion in the nuclear warhead programme. 

Under the AUKUS partnership with the US and Australia, up to 12 new attack submarines will be delivered by 2030. 

He also promises better pay, equipment and housing for members of the armed forces. 

We're building up to a dozen new attack submarines as part of the AUKUS programme, in response to rapidly increasing threats.

This builds on a £15 billion investment in our sovereign nuclear warhead programme and will support 30,000 highly skilled jobs across the UK???? pic.twitter.com/u0TRUalGLk

— Ministry of Defence ???????? (@DefenceHQ) June 2, 2025

10.16am: More on mortgages 

More details on that mortgage data. 

Net mortgage approvals for house purchases decreased with a fall of 3,100 for April compared to March, data from the Bank of England showed. 

Net borrowing of mortgage debt by individuals decreased sharply by £13.7 billion to an overall negative figure of -£0.8 billion in April, following an increase in net borrowing by £9.6 billion in March. 

The BoE data also shows the 'effective' interest rate on newly drawn mortgages, in other words the actual interest paid, slightly decreased in April to 4.49%. However, the rate on the outstanding stock of mortgages increased to 3.86% from 3.84%. 

Alice Haine, analyst at Bestinvest, notes that the BoE's indicator of future borrowing fell for the fourth consecutive month, while net mortgage borrowing plunged as the short-term surge in buyers racing to get deals completed before the stamp duty threshold changes took effect, dropped off.

"April was too late to secure a mortgage and complete a residential property purchase before the thresholds reverted to the previous lower level, so any buyers pushing ahead with a purchase that month would have already accepted the higher costs."

She says uncertainty in the wider economy is "likely to have also played a part" in the softer mortgage approval data, a result of inflationary pressures in the domestic economy in ‘Awful April’ when households were hit with a raft of bill hikes and the sharp increase in employment costs for businesses.

This comes on the same day that the housing market was shown to have remained resilient with prices rising 0.5% on the month in May, according to Nationwide.

With four interest rate cuts from the BoE's monetary policy committee since August last year, Haine says it remains unclear whether May’s rate cut will be followed with another cut in June -- "though as persistent inflation and the sharp rise in the minimum wage may encourage the BoE to stick with the status quo".  

The Nationwide price rise comes after a steep fall in April.

EY Item Club economist Matt Swannel says this "partially reflects some volatility in the month-to-month house price data", adding that "we expect this soft patch to be temporary, although by the end of the year we expect the housing market to only see subdued growth as interest rates fall slowly, affordability is stretched, and some economic uncertainty persists".

9.57am: Mortgage approvals soften

There's been a flurry of economic updates in the past hour.

Mortgage approvals data fell to 60,463 in April, missing the 63,000 forecast and down from 63,603 in March.

The drop signals continued pressure on the housing market amid high borrowing costs.

Elsewhere, the CBI’s latest growth indicator survey showed that private sector firms still expect activity to fall in the next three months.

Expectations are now at their weakest since September 2022.

9.40am: UK manufacturing PMI better than expected

The UK manufacturing sector was marginally less negative than expected last month, according to the manufacturing PMI survey.

May's reading came out at 46.4, below the 50 mark that separates contraction from expansion, but better than the 45.1 flash reading that came out mid-month. 

Domestic and overseas market conditions remained turbulent, the survey found, but both input costs and selling price inflation eased.

"May PMI data indicate that UK manufacturing faces major challenges, including turbulent market conditions, trade uncertainties, low client confidence and rising tax-related wage costs," said Rob Dobson, drector at S&P Global Market Intelligence.

"Downturns in output, new orders and new export business have continued, and business optimism has stayed subdued by the historical standards of the survey.

"Smaller manufacturers are experiencing the sharpest pinch, registering the steepest retrenchments in output and demand and seeing their confidence slump to a near record low. Job losses are also rising across manufacturing, with the rate of decline in employment gathering pace.

"There are some signs of manufacturing turning a corner though. PMI indices tracking output and new orders have moved higher in each of the past two months, suggesting the downturn is easing, and came in better than the earlier flash estimates for May.

"That said, trading conditions remain turbulent both at home and abroad, making either a return to stabilisation or a sink back into deeper contraction likely during the coming months."

9.07am: Indivior – farewell, we hardly knew how to spell ye

As one newcomer arrives, another in the shape of Indivior PLC (LSE:INDV) (which I'm sure I can't be alone in often wrongly spelling as Invidior) is set to part ways with the London Stock Exchange.

Itself also a spin-out (from Reckitt Benckiser in 2014), the company moved to a primary listing in New York last year and today said it is cancelling its secondary listing in London, drawing a line under a volatile 11-year chapter.

Its tenure was marred by legal battles over its opioid addiction treatments, loss of patent protection, investor distrust, and a growing disconnect between its UK listing and US-focused operations.

A single primary listing on Nasdaq best reflects the profile of Indivior’s business,” says chair David Wheadon, noting that over 80% of its revenue now comes from the US.

8.42am: Anglo spins off AmPlats as Valterra 

Anglo American PLC (LSE:AAL) says it completed the sale of 51% of its interest in its AmPlats platinum group metals business, now named Valterra Platinum Ltd (LSE:VALT, JSE:VAL), on Saturday, along with an associated consolidation of its own shares on Sunday.

Shares in Valterra have now started trading in London under the ticker symbol VALT, alongside its existing primary listing in Johannesburg.

Following the demerger Anglo American will continue to hold around 19.9% of Valterra and said it intends to retain this shareholding for at least 90 days following the demerger, with the stake to be "managed responsibly over time to effect a full separation".

Anglo CEO Duncan Wanblad said: "For Anglo American, this is a major step in our plan to unlock the inherent value in our portfolio as a whole, with enhanced focus on our world-class positions in copper, premium iron ore and crop nutrients."

Valterra shares first traded at a price of 2,830p and after almost an hour had risen 4.5% to 2,960p, while Anglo shares are 0.6% to 2,191.5p after the consolidation, down 12.4% from Friday if that is ignored (as some price streams are doing). 

8.29am: Tariffs and bonds still in focus at start of June

The FTSE 100 is down over 30 points, with exporters and US companies seeming to be the bigger fallers: Diageo and Ashtead down over 1% .

In the top 10, AstraZeneca, Unilever, Rio Tinto, BAT and RELX are in the red.

Market analyst Kathleen Brooks says the start of the new month will bring a plethora of economic information that will be "vital for asset markets" but she says first it is useful to "look at the context and piece together key themes from May".

The past month saw US stocks resurgent, outperforming their European counterparts amidst a rebound from the tariff sell-off, with the Nasdaq outperforming the S&P 500, "which hints at tech dominance coming back into play".

The S&P 500 semiconductor index was one of the best performing sectors last month, led higher by Microchip Technology, Broadcom and Nvidia, which all rallied more than 25%, Brooks notes, with autos also performing well in the US, mostly from Tesla.

"A recovery in tech stocks is a sign that risk appetite improved dramatically last month as US trade tensions with the rest of the world eased, and agreements were struck with the UK and China."

But tariff risks are back in focus, Brooks says, with President Trump doubling the tariffs on steel and aluminum on Friday.

"This was designed to hurt Chinese producers, however, it will also hurt European producers, and it may open the door to a more aggressive approach to tariffs from the White House, and more retaliation from China, something that financial markets thought had been put to bed in mid-April.

"2025 is becoming the year not to take anything for granted.

"Equity market volatility eased in May, yet it could easily pick up again in June, if trade tensions emerge. US equity market futures are pointing to a lower open later today, along with European futures, as stocks start June on the back foot."

With the bond market a key focus last month as bond yields around the world started to rise in unison, led by Japan, the US, the UK and Canada.

"Although bond market volatility also eased last month, it did so at a slower pace compared to equity market volatility. This suggests that rather than a knee jerk reaction in the bond market, we may need to get used to a slow grind higher in western bond yields, especially for indebted nations that are grappling with exceptionally elevated levels of public sector spending," says Brooks. 

While the UK 10-year gilt yield is "officially the ugliest" of the European bond markets, with the yield rising 16 basis points last month, followed by the Japanese 10yr at 11bps, she says US and Canada "share the trophy for the ugliest bond markets", their 10-year yields rose by 20 and 30 bps last month, respectively.

"The Trump administration is trying to push through  a massive budget that focuses on more tax cuts than spending cuts, which is spooking investors. JP Morgan CEO, Jamie Dimon, is the latest market afficionado to predict that the US bond market will break if public spending does not fall substantially. The same could be said for Japan and the UK."

8.15am: FTSE 100 starts in stalemate 

The FTSE 100 has started with the predicted stalemate, just minutely below flat at 8,771.5. 

Topping the risers are defence and aerospace names, with Babcock International PLC (LSE:BAB) up 3.3%, followed by BAE Systems PLC (LSE:BA.) and Rolls-Royce Holdings PLC (LSE:RR.), while precious metals miners Fresnillo PLC (LSE:FRES) and Endeavour Mining PLC (LSE:EDV) are poised to overtake.

The price of gold is up 2% to $3,355 and silver is on the rise too.

Oil giants Shell and BP are providing support too, up 0.2% and 0.5%, as oil prices are elevated, with Brent crude up to $64.4 a barrel. 

Fallers are led by Anglo American PLC (LSE:AAL), down 12.5% as it completes the demerger of its Valterra platinum business. 

7.58am: Subs boost for BAE and Rolls

Plans for the UK to build up to 12 new Royal Navy attack submarines will be unveiled today, according to reports, which should provide a boost to defence groups such as BAE Systems PLC (LSE:BA.) and Rolls-Royce Holdings PLC (LSE:RR.). 

Prime Minister Kier Starmer and Defence Secretary John Healey will unveil a major defence review later today, according to newspaper reports on Sunday that suggested the armed forces will be moved to a war-ready footing to deter potential threats.

As part of this review, Starmer will announce the building of "up to" a dozen nuclear-powered submarines to replace the UK's current fleet from the late 2030s onwards, as part of the AUKUS partnership with Australia and the US.

BAE Systems was the company contracted to build Australia's AUKUS submarines, using nuclear reactors from Rolls-Royce, it was revealed last year. 

7.41am: Vodafone Three merger completed

Vodafone Group PLC (LSE:VOD) completed the merger of its UK arm with rival Three UK on Saturday, creating a new business called VodafoneThree that it owns 51% of.

The FTSE 100 company said it plans to invest £11 billion over the next 10 years, including £1.3 billion of capital expenditure in this first year, to accelerate the roll-out of its 5G network. 

Combining the two businesses is expected to result in annual 'synergies' of £700 million by the fifth year, while Vodafone predicted that the transaction will boost its adjusted free cash flow from the 2029 financial year.

Group chief executive Margherita Della Valle said: "The transaction completes the reshaping of Vodafone in Europe, and following this period of transition we are now well-positioned for growth ahead."

7.25am: UK housing market remains bullish

UK house prices edged higher in May, with annual growth rising to 3.5% from 3.4% in April, according to the latest figures from Nationwide that show the market remained stronger than expected following the end of the stamp duty holiday.  

On a monthly basis, prices were up 0.5% after seasonal adjustment, reversing the 0.6% fall reported the previous month.

The average UK house price now stands at £273,427, up from £270,752 in April.

Robert Gardner, Nationwide’s chief economist, said that while activity levels spiked in March as buyers brought forward transactions to avoid extra stamp duty costs, the market and mortgage approvals data suggest that market activity has held up well.

Despite broader global economic uncertainties, he sees underlying conditions for UK home buyers remain supportive, with low unemployment, rising real earnings, and the potential for lower borrowing costs if the Bank of England reduces rates later this year.

7.16am: FTSE 100 may be caught in stalemate

The FTSE 100 is likely to be caught in various crosswinds on Monday morning, beginning the month of June locked in a stalemate of geopolitics and conflicted market sentiment. 

On the futures market, the London index was called four points lower, after finishing last week positively, adding 55 points to close at 8,772.38.

Over the whole of May, the benchmark added 176 points to recover another swathe of the losses in the wake of the US tariffs imposed the previous month. 

Oil prices will provide a lift for heavyweights Shell and BP this morning, with Brent crude up 2.3%% on renewed tensions in Ukraine.

But Asian markets are bathed in red, with Japan's Nikkei down 1.3% and Hong Kong’s Hang Seng index down nearly 2%.

News that Chinese property developer New World Development slid further into distress amid delayed interest payments on some bonds is "reminding investors of China’s ongoing property crisis lurking beneath the AI shine", said market analyst Ipek Ozkardeskaya. 

Trade talks between Japan and the US were not seemingly making much progress either. 

Japan PM Ishiba: We have zero intention to compromise on US tariffs#MacroEdge

— MacroEdge (@MacroEdgeRes) June 2, 2025

Announcements due on Monday 2 June:

Finals: Sirius Real Estate Limited

Overseas earnings: Campbell Soup

Economic announcements: Nationwide House Price Index (UK), BoE Consumer Credit and Mortgage Approvals (UK), Manufacturing PMIs (EU, UK, US)