TOMORROW, George Osborne will deliver his Autumn Statement, supposedly focusing on economic growth. There will also be fresh data on government finances from the Office of Budget Responsibility. The statement is likely to contain a mixture of bad news for taxpayers as well as government subsidy for pet ideas. It is unlikely to contain anything unexpected, but some sectors – particularly UK housebuilders – may show a short-term rally on the confirmation of their expected government handouts.
After entering Number 11, George Osborne announced that his deficit reduction plans would set the UK on course to eliminate its structural deficit by 2014-2015. Many expect that he will announce tomorrow that he is set to fall short on that objective (though because he is focusing on the structural, rather than cyclical deficit, he may yet be able to fudge the numbers). Though this announcement would be no surprise, with bond markets so skittish, Angus Campbell, head of sales for Capital Spreads says that we should be looking to the reaction of UK gilts. “Will this lead to a sell off of our bonds and cause our yields to spike the way that France, Italy and Spain’s have? This is probably the real area that traders will be focusing on tomorrow.”
Even though the government has already squeezed dry the stagnating economy, the Treasury may attempt to bludgeon the country with further tax rises, perhaps on banks or on higher earners seeking to save for their pensions. There is some talk that the rules on the tax-treatment of non-domiciles could be modified again and that we could see the introduction of a statutory residence test. “As a result of the fact that growth forecasts are expected to be lowered, he can’t use any bazookas to do anything radical like cut VAT,” says Angus Campbell, head of sales for Capital Spreads. “He needs as much tax as possible coming in to have any chance of making his deficit reduction targets and so we might see some retail stocks come under pressure.”
BUNG FOR BUILDERS
Osborne will use the statement to confirm that he will underwrite the mortgages of sub-prime first time buyers of new built homes.
Last week, David Cameron unveiled his support of the scheme which would also use £400m of taxpayer funds to aid housing developers. The announcement will be welcome news for housing developers – and for anybody with fond memories of the last time that a government manipulated the mortgage market. But according to Manoj Ladwa, senior trader at ETX Capital, although the news could give the sector a small blip, any boost has already been factored in.
Tomorrow’s speech will not be a game changer for the markets, but traders should look to any short term moves in UK gilts – especially in the case of any surprises.