Stocks have rallied sharply as it looks like the Israel-Iran ceasefire holds up as US President Donald Trump lands in the Netherlands to do a victory lap. But gains this morning are more muted as investors pause to see what happens next. Israel and Iran seemed to be complying with a US-brokered ceasefire. Crude has wiped out its geopolitical premium and looks like it will trade sideways at best. The defence theme looks like it’s going to run and run and Babcock is testament to that, as Europe signs up to spend a lot more.

The FTSE 100 started brightly after a flat session yesterday, but has fallen back a little and is now marginally in the green. The evaporation of oil’s geopolitical risk premium over the last couple of days has affected the index due to BP and Shell’s weighting but overall the market looks robust enough. Babcock surged to the top of the FTSE on a very strong preliminary results update and bullish-sounding CEO comments, which come as the Nato summit sees UK and European nations come together for what Dave Lockwood calls a “new era” for defence. BAE Systems and Rolls-Royce are both trading firmer as investors continue to buy into this trend, which seems to have significant structural tailwinds. Other than that, miners picked up some bid to help lift the index higher, whilst we have some weakness in financials and some of the bond proxies like utilities and other defensive names such as Imperial Brands and Diageo.

US stocks surged yesterday with the S&P 500 rising 1.1 per cent to within a whisker of its all-time high and we saw a record high for the Nasdaq 100 – no keeping good stocks down I guess. The semiconductors did very well though Apple was down on a strong day for the rest of the index. Tesla fell over 2 per cent after Monday’s dealer-hedging rally as European sales slumped once more. Nvidia rose and within a whisker of its all-time high at $153.

Federal Reserve chair Jerome Powell stuck to his wait-and-see rhetoric on monetary policy but he was drawn into saying “could see inflation come in not as strong as expected.” “Lower inflation, weaker labour could mean earlier cut.” US Treasury yields slipped with the two-year benchmark closing at its lowest level since early May at 3.82 per cent, down four basis points, and following through lower still to 3.79 per cent overnight. Powell’s arguably more dovish comments on cutting rates seemed to have prompted the move. The 10-year Treasury yield benchmark closed at an almost two-month low 4.30 per cent. European yields are not following suit though as Germany said it would raise bond issuance by €19bn in the third quarter as it’s set for €500bn stimulus over the next five years. 

On the fiscal side – the Welfare Reform rebellion is something to pay heed to in the UK with more than 120 Labour MPs signed up to an effort to block the bill. If it fails it will show Labour cannot take even tougher decisions and ultimately gilt markets will react and we could see a fiscal crisis building which will affect UK assets, particularly sterling. 

Companies

Babcock shares jumped after the company reported a 53 per cent rise in pre-tax profits in the year to the end of March. CEO David Lockwood hailed a “new era for defence” and it’s hard to argue with Britain committing to Nato’s 5 per cent of GDP target and today announcing plans to buy jets capable of firing nuclear weapons, marking a radical expansion of Britain’s nuclear deterrent. Dividend up 30 per cent and outlook for FY26 margins raised. Babcock is a straight-up winner from more spending.

THG shares jumped 8 per cent, the company saw a much improved quarterly momentum with a return to positive revenue growth in Beauty and Nutrition. SpaceX supplier Filtronic fell 2 per cent despite reporting a 120 per cent rise in revenues to £56.3mn. Halfords was flat – profits rose 6.4 per cent to £38.4mn, which was ahead of guidance. Carnival raised outlook after booking higher-than-expected revenue and profit in the second quarter. More on that here

In the US, FedEx shares fell 6 per cent in after-hours trading after it suspended FY26 guidance, noting persistent weak demand. Citigroup added Pinterest and Reddit to its list of short-term upside opportunities. Wells Fargo said buy Visa and Mastercard on recent weakness due to concerns that stablecoins could threaten the traditional payments ecosystem.

By Neil Wilson, investor strategist at Saxo UK