Although yesterday’s UK Budget was generally well received in the international markets, with the fiscal taps to be left fully open until December, the British Pound did rally.
With the major decisions pre-announced earlier this week, a big equity market reaction to the Budget speech was unlikely anyway.
In addition to the extension of Covid-19 specific support, the Chancellor is aiming to promote investment in the near-term, specifically via the 130 per cent ‘super deduction’ tax incentive.
Faster GDP growth will generate higher tax receipts, but additional revenue raising measures will be necessary eventually, commented Ian Williams, economics & strategy research analyst at Peel Hunt.
“The pain comes later, with the proposed increase in corporation tax to 25 per cent pre-announced for April 2023, lifting the overall UK tax burden to its highest in 50 years,” he said this morning.
Sector specific winners included travel & leisure, banks and housebuilders, he pointed out.
The FTSE 100 was the biggest riser in Europe yesterday as the generous Budget from Rishi Sunak, UK Chancellor of the Exchequer, helped the British market outperform its continental neighbours.
For the most part, Budget support came from the rolling over of existing programmes, said David Madden, market analyst at CMC Markets UK, this morning.
The furlough scheme was due to expire at the end of next month but it will continue until September, so “that is good news for the 4.7m people on the scheme,” he told City A.M.
VAT was cut for non-essential retail last year as a way of providing some much-needed help to the hospitality and leisure sectors, the lowered rate will remain in effect for an extra six months.
“If everything goes according to plan, the economy should be restriction-free by late June, so many businesses like cinemas, pubs and restaurants will only be starting to get back on their feet, so the announcements were welcomed.,” Madden said.
The taxes on beer and spirits will be kept on hold as an added boost to the pub sector. The relief on business rates will stay in place until the end of June.
The housing market received a boost as it was confirmed the government will guarantee a 95 per cent mortgage scheme for first-time buyers.
In addition, the stamp duty holiday on properties worth up to £500,000 has been extended for three months as a way to help push through the transactions that are being processed.
Also announced yesterday were February’s final UK PMI readings, with services 49.5, composite 49.8. They featured a surge in the confidence measures, with the services indicator for the next 12 months at its highest since 2006., said Williams.
“The inflation picture is worth watching, as companies are report greater success in passing on cost increases,” he noted.
Across the pond
President Biden announced the US will have such a large supply of vaccines, that every adult in the country should be inoculated by the end of May, two months ahead of schedule.
The US bond market tantrum returned last night, not a full-blown one, mind you, just enough for “the baby to throw a few of its toys out of the pram,” said Jeffrey Halley, senior market analyst at OANDA, this morning.
The move by bond yields was somewhat surprising given that the ADP Employment data for February was disappointing, adding only 117,000 jobs.
“The index has an opaque component weighting attached to the previous month’s Non-Farm Payrolls number, which disappointed in January and may account for the ADP miss,” Halley explained, adding that he remains confident that tomorrow’s February Non-Farm Payrolls will outperform, possibly well North of 200,000 jobs.
“What should be a bullish indicator for equities is likely to be negative in current market conditions, as bond yields will likely squeeze higher,” he noted.
In contrast to the action in equity, bond and energy markets, currency markets remain in a state of suspended animation.
The US Dollar continues to range, the dollar index edging lower to 90.80 overnight, although the equity sell-off in Asia has pushed it higher by 0.15 per cent to 91.07 today. A further squeeze in US bond yields this evening could see the index test resistance at 91.60, Halley pointed out.
Although markets are ranging, several currencies remain vulnerable to US dollar strength.
“Although yesterday’s UK Budget was well received, with the fiscal taps to be left fully open until December, the British Pound could not rally,” Halley concluded.