FTSE hits new high as defence sector rallies

Markets kicked off 2026 with resilience amid geopolitical volatility. Overall, a risk-on tone prevailed as investors balanced geopolitical headlines with hopes of policy clarity heading into the new year. The FTSE 100 hit fresh record highs, propelled by a powerful rotation into commodity and value-heavy sectors, alongside robust sentiment in retail and defence. Key contributors included strong trading updates from Next and Marks & Spencer, which lifted retail sentiment. Meanwhile, defence stocks such as BAE Systems, Babcock and Rolls‑Royce rallied after the US took action against Venezuela and President Trump declared that the US will control Venezuelan oil sales from now on. Banking stocks also supported the rally, buoyed by profits and expectations of Bank of England rate cuts. A weaker pound further enhanced the appeal of overseas‑earners within the index, completing the bullish backdrop. 

In the US, equities were mixed. The Dow marked a record high on Monday, driven by energy and industrial stocks following news of US action in Venezuela, while the S&P 500 and Nasdaq edged up modestly. Treasury yields climbed as investors awaited key US employment data on Friday. 

The FTSE 100 was up 1.3% over the week by mid-session on Friday, with the more UK-focused FTSE 250 trading 2.3% ahead.

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Donald Trump

The US launched a large-scale military operation in Venezuela, bombing multiple sites in Caracas and capturing President Nicolás Maduro and his wife, who were flown to New York to face narco‑terrorism charges, while Venezuelan vice‑president Delcy Rodríguez was sworn in as interim leader. President Trump has announced that 30–50 million barrels of Venezuelan oil will be handed over to the US and sold under his direct control, with proceeds purportedly earmarked for both American and Venezuelan benefit. Although analysts warn disruptions to Venezuela’s oil output – currently less than 1% of global supply – are unlikely to dramatically move already oversupplied markets in the near term. US‑based energy firms saw substantial share price gains amid speculation of long‑term access to Venezuela’s vast reserves. This intervention marks a bold shift in US foreign policy, reasserting Washington’s influence across the hemisphere, triggering legal and congressional debate at home, and heightening geopolitical tensions with Russia, China and Latin American nations concerned about sovereignty and precedent.  

A US-led revival of Venezuelan heavy‑sour crude – which is similar to Canada’s oilsands output – under President Trump risks undercutting Canadian oil exports to the US. Gulf Coast and Midwest refiners, already equipped to process such grades, would likely choose cheaper Venezuelan barrels, reducing demand for Canadian heavy crude and squeezing its price premium (Western Canadian Select). Canadian producers are already seeing heavy‑oil prices reach one‑year lows amid speculation of increased Venezuelan supply. This shift could redirect investment away from Alberta’s oil sands, weakening the rationale for new pipelines to the US, and prompt calls to diversify exports to Asia. It would make Canada more vulnerable economically and politically in the global energy transition. 

If cheap Venezuelan oil floods US markets under Trump’s plan, domestic producers – especially shale operators – face significant margin pressure. Heavy-sour Venezuelan crude competes directly with Canadian and US Gulf Coast grades, and its lower cost could push refiners to favour imports over pricier domestic barrels. This would likely depress benchmark prices for US shale blends, squeeze cash flows, and slow drilling activity, particularly in high-cost basins. While refiners benefit from cheaper feedstock, the move risks undermining US energy independence narratives and could trigger political backlash from oil-producing states reliant on income from shale operations.

While markets have initially shrugged off the news, the uncertainty from recent events highlights a bigger trend: investors must navigate an increasingly volatile tripolar world shaped by the US, China, and a bloc of unaligned nations. Geopolitical complexity is increasing. 

President Trump reignited international concern by once again asserting that “we need Greenland from the standpoint of national security”, suggesting the US might pursue control of the Danish territory. The remarks, first made in an interview with The Atlantic on 4 January and later aboard Air Force One – where he quipped “ask me in 20 days” – prompted swift and stern push‑back from Copenhagen and Nuuk. Danish prime minister Mette Frederiksen described the proposal as “absolutely absurd” and warned it threatened the fabric of Nato, while Greenland’s premier Jens‑Frederik Nielsen called it “disrespectful” and declared “enough is enough – no more fantasies of annexation”. European allies from the UK, Germany and the Baltics echoed the sentiment, stressing decisions about Greenland must be made by Greenlanders and Danes alone. If pursued, Trump’s claim on the territory could raise fresh geopolitical tensions over Arctic sovereignty and damage unity within Nato.

Economics 

Economists surveyed by the Financial Times newspaper were clear: they think tax increases are virtually unavoidable for the UK before the next general election. The annual poll of 96 leading economists found the economy will likely underperform, with growth falling short of the Office for Budget Responsibility’s 2% forecast – leaving tax receipts weaker than anticipated. Maxime Darmet at Allianz Trade predicted that shortfalls in receipts would make yet more tax rises “probably” inevitable. Warwick University’s Andrew Oswald argued that, without hikes to income tax and VAT, “we cannot make the damn sums work”. Meanwhile Sir Howard Davies, of Sciences Po and former LSE director, cautioned that growth might lag some G7 peers, as tax rises weigh on business confidence. In short, the consensus from these economists is that fiscal pressures will force Chancellor Rachel Reeves to revisit tax policy before the next general election. 

The latest S&P Global UK Construction Purchasing Managers’ Index (PMI) report shows the construction sector remains in deep contraction, with activity slipping to 40.1 in December. This was the second-lowest reading since May 2020, though slightly improved from November’s 39.4. Housing, commercial and civil-engineering work all posted their sharpest declines since the pandemic’s onset, driven by weak client confidence and delayed investment decisions ahead of the Autumn Budget. However, the pace of new order reduction eased – and business optimism rebounded to a five-month high, with around 37% of respondents anticipating growth in 2026, buoyed by expectations of increased utilities and energy-infrastructure spending, as well as hopes for lower borrowing costs. 

Shop price inflation edged up in December as food price rises continued to add pressure to household budgets, the latest British Retail Consortium Retail Sales Monitor indicates. Food inflation increased to 3.3%, up from November’s 3% and far outstripping wider shop price inflation of 0.7%. Fresh food inflation increased higher still to 3.8%, up from 3.6% in November but below the three-month average of 3.9%. But deflation on products other than food remained steady at 0.6% amid widespread promotions across popular gifting categories, including toys, books, and home entertainment. BRC chief executive Helen Dickinson said: “While falling energy prices and improved crop supply should help ease some cost pressures, increased public policy costs and regulation will likely keep inflation sticky.” Despite the cautious backdrop, retailers reporting on Christmas trading issued upbeat statements (see below).

The UK’s new car market crossed the milestone of 2 million registrations in 2025 – the first time since the pandemic – with 2,020,520 new cars sold, a 3.5% increase on the previous year. Battery electric vehicles (BEVs) were a key driver, with 473,348 units registered, up 23.9% year‑on‑year, and capturing a 23.4% market share, though this remained below the government’s 28% Zero‑Emission Vehicle mandate. It was also driven by sales of Chinese EVs and plug-in hybrids – Chinese brands increased their share of the UK’s EV market to 12.8% last year, compared with 8.5% in 2024. Plug‑in hybrids grew by 34.7%, hybrid electric vehicles increased by 7.2%, while conventional petrol and diesel vehicles continued to decline. December alone saw 146,249 registrations – a 3.9% rise – with BEV uptake hitting 32.2%, the only month to surpass the mandate target. SMMT chief executive Mike Hawes cautioned that, although reaching two million registrations is a solid recovery, the pace of electrified vehicle growth remains “too slow and the cost to industry too high”, warning that the £5.5bn in EV discounts used by manufacturers makes current momentum vulnerable. 

Copper prices surged to record levels above $13,000 a tonne, propelled by a potent mix of tightening supply and surging demand. Supply disruptions – from mine accidents at Freeport-McMoRan’s Grasberg mine in Indonesia to strikes in Chile – have created a significant shortfall. Inventories in US warehouses have ballooned amid fears of issues with tariffs, exacerbating the tightness in the market globally. On the demand side, structural growth from electric vehicles, renewable grid build‑outs and a boom in data centres supporting artificial intelligence have drove a 40% rise in prices over 2025. Geopolitical concerns, including efforts by the US to secure critical‑minerals supply chains and volatility in Venezuela, have further fuelled market anxiety. Looking ahead, sustained investment in mining capacity is essential to balance the market, with breakeven levels for new projects now being estimated above $13,000 a tonne. However, Goldman Sachs forecasts a mild correction in 2026, anticipating prices easing to a range of $10,000–$11,000 before stabilising as new supply comes online and market imbalances ease. 

Inflation across the eurozone has dropped back to the European Central Bank’s target. Prices rose at an average annual rate of 2% in the year December, statistics body Destatis estimates, with energy prices 1.9% lower than a year ago.

Geopolitics

Ukraine’s peace talks have entered a critical phase after a St Petersburg-brokered US-backed 20‑point roadmap was declared “90%” complete by President Volodymr Zelensky. He spoke ahead of a European summit in Paris held this week aimed at locking in post‑war security guarantees, potentially including multinational troop deployments and a US-led ceasefire monitoring mechanism. Kyiv has convened security advisers from roughly 15 European and Nato countries, supported via video by US envoy Steve Witkoff, yet the process faces renewed setbacks. Russia has accused Ukraine of launching a drone strike on Putin’s residence – an allegation Ukrainian officials and intelligence agencies have roundly dismissed as manufactured to derail diplomacy. With clashes ongoing and key issues around Donbas territory and nuclear plant control still unresolved, Zelensky has reiterated Ukraine’s readiness to defend itself if diplomacy fails, while acknowledging the talks have edged closer to a breakthrough. 

The UK is pursuing a strategic “reset” with the European Union (EU) that includes initiatives to bring the UK into closer alignment with the bloc’s rules. Prime Minister Keir Starmer’s government plans to introduce “dynamic alignment” powers enabling ministers to adopt future EU regulations in areas like carbon markets and food standards, reducing trade friction and paperwork. Reports suggest that financial services are not included in the plans.

Companies

Glencore and Rio Tinto confirmed they have restarted merger discussions. The mooted all-share deal would create the world’s largest mining company – exposed to iron ore, copper, coal, nickel and possessing a dominant commodity‑trading arm. Both companies emphasise that talks remain preliminary with no guarantee of an offer, yet London‑listed shares of Glencore dipped nearly 2% while Rio Tinto’s fell around 0.8% on the news. Under UK takeover rules, Rio must either firm up a bid or walk away by 5 February – or seek an extension. Investor reaction has been mixed. Some see strategic rationale in pairing Rio’s low-cost project assets with Glencore’s trading powerhouse, especially amid a copper price rally, while others caution over valuation risk, cultural fit and Rio Tinto’s coal exposure likely needing divestment to placate stakeholders. 

Tesco delivered a resilient third quarter and festive trading performance in the 19 weeks to 3 January, with group like‑for‑like sales up 2.9% overall – led by a 3.7% rise in the UK and Ireland – and fresh food up 6.6%, pushing the grocer to its strongest UK market share in over a decade (29.4%). Online sales climbed 11.2%, boosted by expanded Christmas‑Eve capacity and 250,000 new customers for its Whoosh service. Booker’s performance lagged with a 1.3% decline over the period, while central Europe grew modestly at 1.0%. Confident in its trajectory, the group reaffirmed its full‑year operating profit guidance at the upper end of the £2.9bn-£3.1bn range and remains on track for retail free‑cash‑flow of £1.4bn to £1.8bn. 

J Sainsbury delivered a robust trading update for the 16 weeks to 3 January 2026, with total retail sales excluding fuel up 3.9% year‑on‑year, underpinned by a 5.4% increase in grocery sales and fresh food surging 8%, while the premium Taste the Difference range grew 15%. Despite a slight 1.1% dip in general merchandise and clothing and a 1.0% decline at Argos, the supermarket chain bolstered its profit outlook, reiterating underlying retail operating profit is set to exceed £1bn and raising its free cash flow target above £550m, alongside plans to return more than £800m to shareholders. 

Marks & Spencer reported a solid Christmas trading performance for the 13 weeks to 27 December, with group sales – including Ocado Retail consolidation – rising 24.2% to £4.993m, or 3.3% excluding Ocado, as food sales expanded 6.6% (5.6% on a like‑for‑like basis) and fashion, home & beauty saw a modest 2.9% like‑for‑like decline to £1,273m. UK food volumes outperformed the market and M&S achieved record market share of 4%, highlighting ongoing strength in its grocery business. The fashion division is gradually recovering from the early‑year cyber‑attack, with online performance improving, while Ocado Retail sales reached £843m following its April 2025 consolidation. Management maintained full‑year profit guidance, underscoring confidence in its “reshaping” plan.

Next has revealed it had a very merry Christmas. The high-street stalwart reported stronger-than-expected Christmas trading, with full-price sales up 10.6% in the nine weeks to 27 December. This is ahead of (albeit usually conservative) guidance of 7% and has resulted in management upping its expectations for full-year pre-tax profits by £15m to £1.150bn. Profits exceeded £1bn for the first time in Next’s last financial year, making it only the fourth UK retailer to hit this milestone after Tesco, Kingfisher and Marks & Spencer. Guidance for the next financial year to the end of January 2027 is for sales and profits to be up 4.5%. As usual, this is likely to be conservative. 

Taiwan Semiconductor Manufacturing Company (TSMC) reported December 2025 consolidated revenue of NT$335bn (US$10.6bn), down 2.5% from November but up a substantial 20.4% year‑on‑year. This meant annual revenues surged 31.6% to NT$3.81tn ($119.9bn) amid strong demand for AI, high‑performance computing and advanced nodes. While the slight sequential dip reflects normal seasonality, the record‑breaking quarterly total of NT$1.046tn ($33bn) exceeded analysts’ expectations, underscoring TSMC’s resilience and its critical role in powering the global AI infrastructure boom.

Topps Tiles kicked off its 2026 financial year with steady growth, reporting a 3.7% rise in first‑quarter revenue versus the prior year, outperforming the broader home‑improvement market. Like‑for‑like sales at its core brand climbed 2% - marking the fifth straight quarter of positive comparable performance. Digital sales surged to 19.7% of group turnover, bolstered by completion of a new customer‑engagement platform and plans for a dedicated trade app in Q3. The swift integration of the Fired Earth acquisition by mid‑December and the appointment of Alex Jensen as new chief executive further underscore management’s confidence in ongoing strategic and financial progress. 

Warner Bros Discovery is currently subject to a fierce takeover tussle between Netflix and Paramount, highlighting the seismic shifts underway in the entertainment industry. In December, Warner’s board struck a $72bn deal with Netflix to sell its studio and streaming arm, including HBO Max, citing superior value and lower risk compared to Paramount’s hostile $77.9bn bid – which covers the entire company including CNN and Discovery networks. Paramount, backed by Skydance and billionaire Larry Ellison, has sweetened its offer but remains locked in a battle to convince shareholders that a full-scale acquisition is preferable. Both deals face intense regulatory scrutiny, and the outcome – whether a Netflix-led divestiture focused on content or a broader Paramount takeover – promises to dramatically reshape the streaming landscape in the US.