UK government bond and pound sell-off continues, shocking day for retailers as Tesco, Marks & Spencer and B&M shares hit by gloomy UK backdrop and Greggs disappoints with festive update

“Turmoil in the markets implies a massive loss of confidence in the UK government. The 30-year gilt yield briefly hit 5.445%, surpassing the Liz Truss crisis period, and the pound slumped to $1.2256 against the US dollar which is the lowest level since November 2023,” says Russ Mould, Investment Director at AJ Bell.

“The feel-good factor around the UK following last summer’s general election has quickly disappeared and turned to gloom as companies brace themselves for higher costs and consumers worry about job security and the cost of living going up again.

“Chancellor Rachel Reeves implied from the start that tough decisions were needed to lay stronger foundations for longer term growth, meaning life could get worse before it gets better. The storm clouds have certainly darkened.

“Investors are worried about extra borrowing by the government to achieve its plans. However, it is worth noting that the pound remains considerably stronger than when Liz Truss briefly ran the country. The UK is also not alone in seeing a higher cost of borrowing for the government as the US has also seen higher yields.

“Negativity has spread to parts of the UK equity market with the more domestic-focused FTSE 250 index having a terrible time, down more than 4% year-to-date. Approximately half of the index generates earnings in the UK whereas about three quarters of the FTSE 100 earns overseas, making that index less of a play on the state of the UK. That explains why the FTSE 100 managed to shrug off the doom and gloom to rise 0.3% to 8,277. Commodity producers led the way, helping to offset a shocking day for UK retailers.”

Retailers: Tesco, Marks & Spencer, B&M

“Despite reporting resilient Christmas performance across the board, retailers Tesco, Marks & Spencer and B&M saw their shares come under pressure as the glass half empty market seized on any traces of negativity. The wider backdrop of surging UK gilt yields and a slump in the pound was doing nothing for sentiment towards domestic stocks.

“In this context the more modest share price decline at Tesco feels like a bit of a win for the supermarket chain – even if it feels equivalent to coming out on top in a fastest snail competition. Tesco delivered strong market share gains in the three months to 4 January. Investors may have been disappointed at the decline in revenue growth, but this reflected lower levels of inflation.

“The lack of upgrades to sales and earnings guidance may have reflected Tesco’s commitment to keeping prices low and having plenty of extra Christmas staff on hand in order to get people through the tills and build loyalty to the brand – all costing money. If so, this looks like a sensible strategy of foregoing a short-term boost in order to derive a long-term benefit from an enhanced competitive position.

“The wholesale division – Booker – has disappointed, not helped by declining tobacco sales and a poor showing for the fast-food market which its Best Logistics operation serves.

“A striking feature of Tesco’s update is the continuing impressive performance of its Finest range – suggesting it may be eating the lunch of high-end rivals such as Marks & Spencer. However, Aldi is making waves with its premium offering so competition remains fierce.

“Marks & Spencer’s commitment to value is paying off with its customers. While food was reassuringly strong, in-store sales of clothing were down, with online coming to the rescue to a certain degree. Meanwhile, the international operations are doing little to justify their place in the wider group.

“Dragging Marks & Spencer’s shares down is the gloomy tone adopted in the outlook statement. While understandable given the impact of the Budget changes, sticky inflation and higher for longer rates, the comments chime with the current bleak mood around the UK’s economic prospects.

“Notably, Marks & Spencer is more reliant on discretionary spend than Tesco, given its much more meaningful presence in non-food categories.

“There is little you could do to dress up value retailer B&M’s quarterly numbers. While hardly a disaster, the negative like-for-like growth in sales reflect poor consumer sentiment and suggest that the chain’s value credentials aren’t doing enough to support demand. A £150 million special dividend, aimed at keeping investors onside, was largely dismissed as the stock tumbled.”

Greggs

“Amid weaker footfall in general across the UK high street in the last quarter of 2024, it’s no wonder that Greggs’ sales growth has slowed down. People are watching every penny and popping in for a coffee and a savoury or sweet snack is now starting to feel like a luxury rather than a transaction that requires no thought.

“Public outrage over Greggs adding another 5p to the price of a sausage roll to £1.30 shows how sensitive consumers are to price hikes. The cost of food has kept going up and we’re reaching a tipping point where people are saying enough is enough, and they’re cutting back on non-essentials.

“Greggs’ sausage rolls now cost 30% more than in 2022 when you could get one for £1. Some people will stomach the higher price, but others will buy less often or not at all, which means Greggs needs to come up with a new game plan. After all, it continues to open new stores and costs are mounting up.

“Greggs is good at product innovation and it will be interesting to see if it launches a ‘cheap treat’ item where it can bank on high sales volumes to keep the tills ringing non-stop.

“Over the past year, analysts have regularly nudged down their 2025 earnings forecasts for Greggs and this trend remains intact following the disappointing post-Christmas update with a further reduction in estimates.

“The broader retail sector is going through a difficult period and it could get worse, which means investors may no longer be prepared to pay premium share ratings for companies in the sector. That’s problematic for Greggs because its shares have typically been more expensive than its peers due to its track record of success.”

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