This morning’s mini Budget has elicited quite the reaction in currency and bond markets, with the pound and bond market falling sharply, after new UK chancellor of the exchequer, Kwasi Kwarteng, unveiled his new fiscal plans.
He started with outlining what we already knew about, capping the cost of energy for households and businesses from October, which he estimated would cost £60bn over the next six months, based on recent prices, which means it could cost more or less than that figure. The NI increase implemented in April would also be reversed in November at a cost of £17bn.
The chancellor also announced that the increase to corporation tax was being scrapped, which had been widely expected. The reports of a cut in stamp duty also turned out to be true, with the rate for first-time buyers raised to £425,000 from £300,000, while the basic rate was raised from £125,000 to £250,000.
It was also announced that the reduction in income tax to 19%, which was slated for 2024 under former chancellor Rishi Sunak, would be brought forward to next year, while in a bold move, the top rate of 45% was being scrapped. The cap on banker’s bonuses was also lifted, while alcohol duty rates are to be frozen from February 2023. There was disappointment from businesses about the continued failure to tackle the thorny issue of business rates reform, which are expected to rise by 10% next year.
If there was any doubt about how much all of this would cost, it came in the form of the debt management office, who announced that they would be issuing £193.9bn in gilts this year, a rise of £62.4bn, to fund the additional spending.
It is this extra borrowing that appears to be spooking bond markets, and while the chancellor was at pains to insist that this would help to kickstart a plan to achieve a 2.5% GDP target, markets aren’t buying it, with moves in UK gilt yields also prompting contagion into bond markets in Europe and the US. Equity markets are also plunging on concerns that this package could further push inflation even higher, and thus make it more difficult to bring back down.
Bond markets slid sharply on the back of the announcement of this new issuance, with the 5-year gilt yield surging through 4%, a record one-day rise, with 2-year and 10-year yields not too far behind. The pound sliding sharply, hitting a new 37-year low against the US dollar in the process, just above 1.1000, and opening the possibility of a move below 1.1000 towards the 1985 lows at 1.0500.
The risk of more aggressive rate hikes in November has now risen sharply, with markets pricing the possibility of a 100 basis-points hike at the next Bank of England meeting.
How to trade the financial markets
An introduction to spread betting and trading CFDs, with example strategies for every style of trading and the three pillars of successful trading.get this free report
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.