It’s a mixed opening in Europe this morning as the ‘end of rate hike’ rally runs out of steam. In London, shares are down around 0.4 per cent, led by Ocado (OCDO). The Dax is up 0.3 per cent while shares are down just a touch in Paris. Overnight, shares in New York managed to eke out another day with the S&P rising 0.74 per cent and even the more industrial Dow rising 0.6 per cent. However, futures show New York will open flat later on today.
Yields ticked lower in the US, with the 10-year Treasury falling by 0.04 percentage points to 4.387 per cent, this was after an auction that went down well with traders and boosted sentiment. This all pushed Asian stocks higher as well with the Hang Seng adding 1.2 per cent and China’s CSI 300 index rising 0.9 per cent.
It’s a quiet week on the global front, although traders will certainly be digging into the minutes from the latest Federal Reserve meeting. More domestically, however, all eyes are on the Treasury and tomorrow’s Autumn Statement.
There were many more ‘rumours’ landing in the Sunday papers over the weekend: with some politically charged tax cuts coming our way. It’s going to be a difficult balance for Chancellor Jeremy Hunt. One, the Tories need something to boost their dismal ratings. But any ill-thought-out tax cuts won’t go down well with the markets, or the Bank of England. At the moment, the only thing really working economically is the fact inflation has halved, as Prime Minister Rishi Sunak said he wanted to earlier in the year, and that rate rises have stopped. Hunt has said he wants tax cuts to boost productivity, so that rules out changes to duties such as inheritance tax. The latest is a 2p cut to income tax: but it’s hard to see how this wouldn’t be inflationary and potentially force the BoE back into action. So what we could end up with is a deferred promise, something that boosts them in the polls, but doesn’t actually come in any time soon: and maybe never given the likelihood of Hunt being in Charge by Spring 2025 is very slim. Hermione Taylor and Val Cipriani break down what else we should be looking out for tomorrow here.
Traders should also pay attention to an update on the macro picture when the Office for Budget Responsibility (OBR) reveals its latest forecasts. Data from the Office for National Statistics this morning has already shown that government borrowing for the financial year-to-October came in at £17bn less than the last OBR forecast. But borrowing was still £98bn – and as the ICAEW’s Alison Ring puts it: “Cash going out continues to exceed cash coming in by a very large margin.”
So, despite all the talk of ‘headroom’ and tax cuts, the government doesn’t really have much room for manoeuvre tomorrow. Fiscal drag has helped the tax take, but economists think that the improvement will be short-lived: a slowing economy will cap tax revenues, and higher borrowing costs will weigh on the public finances over the medium term. According to ICAEW’s Ring: “In reality, there is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them.”
So that should be everyone’s concern: will the political will to appease voters and cut taxes overpower the economic reality? Well, we only need to look to last Autumn to see how that goes down.
The Trader is written by Taha Lokhandwala and Hermione Taylor