- FTSE 100 dropped below 7,000 earlier for the first time since March
- Pound bumps around $1.10 after a dramatic slide
- UK borrowing costs are sharply higher as investors worry about unfunded tax cuts
- House builders lose momentum amid forecasts that interest rates could reach 5%
- Retail and hospitality shares fall back amid ongoing cost-of-living crisis concerns
- Energy giants fall back after oil slides to $86 dollars a barrel
- Banking stocks retreat after government decides not to scrap a surcharge
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’Kwasi Kwarteng’s fireworks budget has not been able to stave off a fresh slide in equity prices with the FTSE 100 dropping back below 7,000 earlier for the first time since March, soon after the invasion of Ukraine. By throwing Rishi Sunak’s tax raising plans on a bonfire, the government is taking a big gamble that growth will be ignited, to help the economy grow. But confidence that these unfunded tax cuts are a coherent policy for today’s inflation laden times is going up in smoke, with the pound sliding to fresh 37-year lows against the dollar at $1.10 and government borrowing costs escalating. The yield on 10-year gilts rocketed to hit 3.7%, surging from 3.2% on Tuesday as investors demanded more return for the greater risk they were taking by buying government debt.
Investors are betting that the Bank of England will dig in its heels further in its economic tug of war with the government and will go hard and fast with rate rises at the next two meetings. The markets are now expecting that the benchmark UK interest rate could jump to 5% by next summer, up from the higher predictions of 4.75% detailed by the Bank of England yesterday.
The initial rosy glow which had shone on house builders earlier faded fast, as investors digested the implications that further UK interest rates are inevitable, given the government’s inflationary policies and would counteract the boost from a cut to stamp duty. It’s clear that the expected correction in house prices can’t be put off indefinitely as mortgage costs ramp up.
Wealthy consumers are the biggest gainers in the tax bonfire, while lower earners will benefit the least and that has been greeted with a sigh of disappointment by investors in many retail and hospitality companies. Shares in the high street stalwart Next have fallen by 3.5% and JD Sports has fallen by more than 5% amid expectation that consumers will have to keep tightening their belts. Hospitality stocks are also on the slide, with no help in sight in terms of a cut to VAT to help companies weather the storm of the cost-of-living crisis.
Although a higher interest rate environment would ordinarily be good for banks as it would boost net income margins (the money they make on loans), banking shares have also fallen back today. It’s not just the deteriorating economic outlook which has pushed down shares. The decision not to get rid of a corporation tax surcharge for the sector is considered a set-back. There had been high hopes that intense lobbying would see this go but the combined rate of tax on profits paid by banks and building societies will stay at 27%, and the lifting of the cap in bankers’ bonuses is small fry to what investors believe such a cut would have meant for the sector, when it comes to competitiveness over the longer term.
The FTSE 100 has also been sideswiped by a deteriorating outlook for the global economy as central banks stand ready to raise interest rates even more sharply. Oil prices have tumbled with Brent falling to $86 a barrel, amid expectations of falling demand, as growth slows around the world. This has pushed down Shell and BP by around 4%. This will be welcome news for motorists particularly given that the government did not move on fuel duty. But energy prices are still set to stay volatile given the jitters surrounding developments in Ukraine.
Russia has begun referendums in the east of the country with expectations that this will be a precursor to Moscow claiming the Donbas region as part of its territory. There are fears subsequent fighting using NATO supplied weapons in such areas could prompt claims by Putin that Russia is being attacked. Indices across Europe are deep in the red, with the DAX in Germany down 1.4%, the CAC 40 in Paris down by 1.6% and Italy’s FTSE MIB falling by 2.6%.’’
