Daily market update: Trump's defence spending proposal, Tesco, Shell, Greggs

Watch the bond market closely as Trump’s proposal to radically increase defence spending could put even more pressure on the already sky-high US national debt.

While Trump insists any extra spending would be paid for by tariffs, bond markets might not be as convinced. Equity markets are already looking a bit doubtful, with futures prices implying a red day for Wall Street.

The proposed sharp increase in the defence budget would be good news for defence contractors, explaining why shares have rallied across the sector. BAE Systems jumped more than 6% while US names such as Lockheed Martin moved in a similar fashion in pre-market trading.

The plethora of defence names on the UK stock market might have rallied, but it wasn’t enough to stop the FTSE 100 from slipping back. The blue-chip index was dragged down by investor disappointment around updates from Shell, Tesco and Associated British Foods.

Tesco

Tesco may see full-year profit coming in at the top end of expectations, but its festive update did not pass the smell test with investors after a slowdown in underlying sales growth over Christmas.

These numbers are not a disaster as the company has its highest share of the British grocery market in more than 10 years.

A more than doubling in the share price from the 2022 lows means the company will be judged more harshly for the slightest misstep.

The wholesale division Booker is a notable drag on performance. While this largely reflects a declining tobacco market, the market will still be looking for improvements despite the difficult backdrop.

Tesco’s online sales were a positive, including significant growth in its Whoosh delivery services. The economics of web-based groceries improve with scale so the company will hope these trends continue.

The recent strong Christmas trading by the discount names Aldi and Lidl shows competition is intense, even if Tesco is well placed among the established supermarkets to fight back.

Offering discount prices through its Clubcard scheme enables it to drive customer loyalty while offering the kind of value the UK’s hard-pressed households are looking for.

Shell

Chief executive Wael Sawan’s tenure at Shell has been generally well-received. His strategic reset, to focus more on profitability and cash flow than the energy transition, is going down well with shareholders.  

However, a teaser ahead of fourth-quarter results shows there are still challenges for Shell, some of which it can control and some of which it cannot.

The weak showing for the oil trading business reflects lower crude prices and that’s a trend which has been exacerbated by recent developments in Venezuela, on the basis US involvement might help unlock the potential in its huge oil reserves.

The weak margins and big loss flagged for Shell’s chemicals division hint at more entrenched problems which the market will want to see fixed.

There was more positive news on its refining division, where profitability has improved, and Shell is largely sticking with its output forecasts for oil, gas and liquefied natural gas.

Having opted not to pursue an ambitious takeover of BP last year, Sawan may be under the spotlight in 2026 as pressure builds on him to demonstrate where Shell’s next phase of growth is coming from.

Greggs

Dan Coatsworth, Head of Markets at AJ Bell, comments:

Greggs’ trading update is as lukewarm as one of its sausage rolls. Fourth quarter like-for-like sales growth of 2.9% is far from outstanding, and forward guidance lacks any sparkle.

It expects no profit growth in 2026, which is a gloomy outlook for a business that’s rapidly expanding across the country and one of Britain’s biggest food-on-the-go names. Weak consumer confidence and extra costs linked to supply chain initiatives don’t bode well for margins short-term.

Despite this disappointing outlook, it’s important to recognise that Greggs is a British success story. It just feels as if the business has grown too fast and that it would be better served taking stock of events, focusing more on improving store efficiency, simplifying the menu, and slowing down the pace of new store openings. Less is more, after all.

Greggs is the most shorted stock on the UK market and those betting against the company have been cleaning up. The shares fell further on the latest news and bears might be happy to sit tight as there wasn’t anything in its update to make them reappraise a negative stance.

The flipside is that the lower the shares go, and the cheaper its valuation, the more likely that activist investors will dial up pressure on the business for change, or takeover interest appears.