- FTSE 100 set to open lower as investors brace for tax changes in the UK Budget.
- Disincentivising investors may not help boost UK growth.
- Chancellor Rachel Reeves’ investment plans will be scrutinised by bond investors.
- UK 10-year gilt yields remain elevated amid the uncertainty, hovering around 4.31%.
- Housebuilders and renewable energy sector may benefit, but gambling firms steel for fresh duty hikes.
- Alphabet wows with AI demand proving super-strong for cloud services.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The FTSE 100 looks set to open lower, as uncertainty swirls about the contents of the UK Budget, the first from a Labour Chancellor in 14 years. UK investors are braced for a shovel of tax hikes to fill a yawning black hole in the UK government’s finances. There is speculation that Rachel Reeves will try to find ways to raise revenue and cut spending to cover a shortfall of up to £40 billion. What seems certain is that low earners will escape any tax hikes, with yesterday’s announcement of an increase in the minimum wage, indicating the priorities for the government. Prime Minister Keir Starmer has promised the payslips of working people will be protected, so there’s an expectation that employers may bear the brunt of tax rises, most likely through increases in National Insurance.
Investors with equity holdings may also be targeted through a higher capital gains tax or the ending of inheritance tax relief on small cap firms, quoted on AIM. There are concerns that this may be counter-productive to the government’s aim to stimulate investment in UK assets. Retail investors are enthusiastic participants in the London stock market, and CGT tax nudges also risk disincentivising investment, which could make it harder for UK-listed firms to grow. But Ms Reeves is likely to railroad such criticism with initiatives for a bazooka of investment spending to boost UK growth. The details of how debt rules will be changed to enable the government to borrow more without breaking its self-imposed borrowing limits are set to be announced. This strategy has been widely trailed to avoid a temperamental attitude from bond investors breaking out, and so far, it appears to have done the trick, although institutions financing government borrowing will keep a keen eye trained on what the swelling investment budget will be spent on. Already her expected Budget plans have been judged by bond dealers to push UK government bond issuance towards £300 billion this year, around a 6% increase on the existing target.
Any sign of profligacy may well be punished by investors demanding a greater return to hold UK debt. Already nervousness has increased, with UK gilt yields pushing higher to around 4.3%, but they are still lower than levels reached in July. Part of this rise has been down to changing interest rate expectations and overall, markets still appear quietly confident that the Chancellor will keep focusing on carving out a reputation for prudence and responsibility. It’s looking unlikely that investment pledges announced today will max out the government’s new borrowing facility under the rule change.
While housebuilders, construction firms and companies providing the backbone for renewable energy are likely to benefit from increased investment spending, businesses in the gambling sector have been steeling themselves for fresh duty hikes. An increase in remote gaming duty is looking likely and although it will pile fresh pressure on companies already facing stricter regulation aimed at limiting problem gambling, it’s unlikely to be a huge game changer for the industry.
Oil prices have nudged higher, recovering some recent losses after data from the industry showed a higher-than-expected drawdown of US stocks. With the Middle East crisis remaining in sharp focus, keeping potential supply issues in the region swirling, Brent Crude has lifted to trade around $71.6 a barrel, but a lid is being kept on prices due to overall slow global demand expectations.
Wall Street spent most of the past session largely treading water ahead of Alphabet’s results, and the Google owner provided a wave of cheer, beating revenue expectations. Sustained growth in advertising certainly helped but it was the boost in demand for its cloud services, helped by AI demand, which really helped lift sentiment. The AI juggernaut keeps powering ahead, confounding expectations of a slowdown, which is set to lift sentiment in trading later. With more here’s my colleague, senior equity analyst Matt Britzman:
Matt Britzman, senior equity analyst, Hargreaves Lansdown:
“Alphabet is the first major tech name to report earnings, and it hasn’t disappointed. Cloud growth was strong, and better than expected, which continues to support the argument that the major cloud providers are well-placed to benefit from the AI revolution. For Alphabet specifically, it looks like its cloud offering is much better suited to this new AI phase of growth than it was in the previous wave where Amazon’s AWS and Microsoft’s Azure fared better.
Search revenue growth was solid at 12%. This is arguably Alphabet’s biggest question mark, as the major unknown is what happens to Google search in the world of AI. This quarter was important as it marked the first full period where Google’s AI overviews were up and running in the US. The solid Search revenue number and a better-than-expected performance in the US, where Search is over half of total revenue, help to back up Alphabet’s claims that it is seeing a material benefit from AI overviews.
With valuations sitting where they are, and Alphabet having multiple routes to play in the AI world, this looks an attractive name from here, and shares were up 4% in after-market trading. The lack of really knockout Search revenue number is likely the only reason we aren’t seeing gains closer to 10% right now.”