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Mini-budget U-turn takes the pressure off gilts and the pound

UK Chancellor of the Exchequer Jeremy Hunt

 

It’s been a positive start to the week for European markets, with decent gains across the board, helped by the continued walk back of the recent UK mini budget by the new Chancellor of the Exchequer Jeremy Hunt.

Europe

Sharp declines in UK gilt yields have provided a solid uplift to the FTSE100 led by utilities and housebuilders, as the UK blue-chip index looks to reverse the declines of the last few days.  

Falling gilt yields and the fact that the stamp duty measures survived the budget cull, have provided a solid boost to house builders Barratt Developments, Persimmon and Taylor Wimpey, along with a lift from the stamp duty measures which survived intact.

While mortgage rates are now likely to fall back modestly because of today’s measures, lower rates of mortgage availability may well temper the rebound as the week progresses.

Utility companies have also got a lift from the scrapping and review of the energy price cap from next year with the likes of Centrica, SSE and National Grid all edging higher.

Amongst the worst performers today have been Hargreaves Lansdown despite the asset manager reporting a 15% rise in Q1 revenues to £162.9m. Net new business of £700m saw assets under management rise to £122.7bn with the company raising its 2023 revenue margin guidance to 49-52bps. This morning’s numbers have been overshadowed by the reports the company is facing a multi-million-pound lawsuit from Woodford fund investors who claimed that the asset manager ignored liquidity and diversification problems at the fund, while continuing to promote it.     

US

US markets have picked up the positive vibe from European trading, opening higher, helped by a decent performance from the US banking sector, with the S&P500 managing to hold above its key 3,500 support level.

When Bank of America reported in Q2 results came in slightly below expectations, with revenues coming in at $22.8bn while profits missed slightly at $0.73c a share. This was largely due to a higher than expected $523m in respect of credit losses, along with $425m in respect of certain regulatory matters. This $425m saw expenses rise to $15.3bn a 2% rise from Q1.

The underperforming parts of the business were investment banking which saw lower revenues and it’s been a similar story in Q3, although the market reaction looks slightly more positive, given outperformance in the trading and consumer parts of the business, which has helped both revenues and profits beat expectations.

Q3 revenues came in at $24.5bn, with investment banking revenue coming in line with expectations of $1.17bn. On a more positive note, trading revenue beat expectations, coming in at $4.1bn, with FICC revenue rising to $2.57bn, and equities trading to $1.57bn. It was also notable that provisions for credit losses were increased to $898m.

The bank appears to be benefitting from the higher interest rate environment with higher-than-expected revenues in its consumer division, with deposits up 7% and loans up 5%. Expenses were also higher as well rising to $15.3bn.

On the outlook the bank remains confident in the US consumer saying that it remains resilient.  

FX

The pound is the best performer and gilt yields have fallen back sharply after today’s statement by new Chancellor of the Exchequer Jeremy Hunt, which pretty much tore up the mini-budget, leaving only the NI and stamp duty cuts as the only remaining measures intact.

The new Chancellor announced measures that would raise an extra £32bn including the scrapping of income tax cuts on an indefinite basis, along with the changes to alcohol duty, dividend income and the IR-35 measures. More controversially he also scrapped the energy price cap from April 2023, although he did say that the Treasury would be conducting a review looking at measures to make it more targeted after that.
One thing is for sure they’d better come up with something, or hope that natural gas prices keep falling between now and next year, or run the risk of an even steeper recession. The fall in gilt yields is still helpful in that it now brings the UK back into the pack when it comes to rising rates, as well as lowering the amount of interest that would have been payable on UK borrowing.

What it doesn’t do is shelter the UK economy from further rate increases from the Bank of England in the coming months, with the prospect that we could see two more 75bps rate rises from the Federal Reserve by year end. If the US central bank were to do this it would increase the pressure on the Bank of England to act in a much more hawkish fashion when they meet next month.  

Commodities

Crude oil prices have edged higher largely on the back of a weaker start to the week for the US dollar, helped by the Chinese National Energy Administration saying that they were looking to increase reserve capacities for key commodities over the coming months. Supplies are also likely to remain fairly tight on the back of the prospect of further production cuts from OPEC+ members in the event the demand outlook continues to deteriorate.

The weaker US dollar and sharp decline in bond yields today is helping to push gold prices off the two week lows we saw on Friday, though today’s rally still remains well short of the highs seen on Friday.

Volatility

The week ended with the Aussie Dollar still very much in focus, accruing further losses against the greenback as the expectation of divergent central bank policies over rate hikes continued to take a toll. The pair closed just below the 0.62 level which many consider a key point of support, with one day vol advancing to 26.77% compared with 17.42% on the month.

Continued gains for the US Dollar are weighing on a number of dollar-denominated assets, with Silver being very much in focus here. The precious metal has been under pressure since the start of the month and came close to testing levels not seen in over two weeks on Friday. One day volatility stood at 50.01% against 38.66% on the month.

Those concerns over continued rate hikes from the Fed also spilled over into equity indices, with the NASDAQ trading in range of well over 4% on Friday. The index has now shed over 20% since the August highs, so sits in that technical bear market territory. One day volatility printed 59.69% versus 35.4% on the month.

Finally, in single stocks JP Morgan was amongst those seeing elevated levels of price action on Friday. The bank reported quarterly results which whilst still showing a 17% year on year decline in income were better than had been expected. That offered up support early in the session although this largely abated as the day continued. One day vol printed 109.89% against a monthly reading of 57.18%.

 


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