UK budget crashes GBP and FTSE 100

[MongiIG]

The perceived cost to the bottom line, in an environment of rising interest rates, has led traders to sell sterling and stocks, even those handed a lifeline by the treasury with tax cuts.

 

 Jeremy Naylor | Writer, London | Publication date: Friday 23 September 2022 

GBP/USD has crashed to a new 35-year low and against the euro, the pound is at levels not seen since January 2021.

The stocks that saw an initial benefit were those that climbed in the wake of the confirmation that stamp duty has been cut to stir the housing market.

House builders saw an initial lift, but those too have now pulled back on fears that not enough time is being allowed before the next election to show and benefit from the measures put in place.

 

UK mini budget

Let's take a look now at the follow-on effects in the markets from the mini budget, or fiscal statement, from the new Chancellor of the Exchequer in the UK, Kwasi Kwarteng, representing this new government, headed up by Liz Truss.

We knew that the budget was going to bring some tax cuts, and it brought about pretty much the biggest and largest number of tax cuts seen in a generation or so.

And the after-effects of all this really felt along party lines with Labour ripping into the Chancellor's speech while the Conservatives cheered him all along for this idea that we've got this new rule and regulation around tax where people can do an awful lot more before getting taxed.

GBP/USD

Let's take a look at what's happening with the trade around this, because I want to go, first of all, with sterling against the US dollar.

We have this big drop, as you can see here. As the speech got underway, there was a little bit of a rise for sterling and then all of a sudden this drop came.

Income tax, cutting the basic rate of income tax, down to 19% from April 2023 and abolishing the top super rate of tax. And at the same time, rules which limit bankers' bonuses have been scrapped.

So this was seen as something which was really opposing everything that certainly the socialists wanted, the opposition party, but this is seen as bringing in more people into the country to do more and to do that they have been supported by extra rules and regulations around freelancing, for example, which is now an awful lot easier than it was previously to be a freelancer in the country.

You can see here against the euro, this is sterling down against the euro, big declines there as well. And it's 35-year lows for sterling against the US dollar.

Let's take a look where we are here. We're now at lows not seen since the 2nd February 2021. Rules around universal credit have been tightened by reducing benefits if people don't fulfill job search commitments. They've cancelled the rise in corporation tax, which was due to be increased from 19% to 25% in April next year.

The recent rise in national insurance is also being reversed and we've got a freeze on energy bills confirmed, which the government claims reduces inflation by five percentage points. You can see the weakness in sterling that is developing around this.

FTSE 100

Just want to show you what's happened with the FTSE 100. There are big declines there as well as a result of what we've been hearing about.

One of the interesting moves that we've seen though in the markets in today's trade, initially we saw gains for some of the house builders on news that, as we had been speculating, there would be a cut in stamp duty.

Now you can see clearly, this is the daily chart for Taylor Wimpey PLC, for example, a big push higher in the stock all the way up to 110 pence. And then, all of a sudden, things started to reverse as people started to calculate how this was going to affect the national balance sheet.

And despite the fact they've put a freeze on energy, which in theory could well keep a lid on inflation by as much as five percentage points, according to the calculations from the Chancellor, that rise in inflation hasn't yet been felt.

So it's not actually going to change the outlook for inflation as things stand at the moment.

This is Persimmon PLC, again, a rise in the stock at the beginning of the speech, and then all of a sudden that was unwound as well. And it's across the house builders, exactly the same price action for Barratt Developments PLC. We saw this push higher in the stock and then that pullback.

But the bottom line is it's clear that the markets have followed pretty much what's happening around the rest of the world and that is money is really only ever going into three areas at the moment and that is the US dollar, yields, and it's also some of these defensive areas of the market, which are being protected by what is otherwise regarded as a febrile environment so far as the economy is concerned.