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UK Finance Minister Announces Measures to Boost Economy, Caution Rattles Bonds and Sterling

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UK Finance Minister Announces Measures to Revive Sluggish Economy

The UK’s finance minister, Hunt, has unveiled a package of measures aimed at revitalizing the country’s sluggish economy. The announcement, made on Wednesday, sought to strike a balance between stimulating business investment and avoiding any disruption to financial markets. However, nerves over borrowing and inflation dampened the reaction in bonds and sterling.

While there were concerns about potential cuts to social security payments, traders were relieved that there were no major giveaways that would be difficult to fund. Instead, the focus was on tax relief measures and incentives for business investment. While some areas of the stock market benefited from these measures, sterling remained tepid due to significantly lowered growth forecasts for 2024.

Hunt’s Autumn Statement marked his second since replacing Kwasi Kwarteng, who was sacked last year following a mini-budget that triggered market turmoil due to under-funded tax cuts. Investors remain cautious about the impact of tax breaks on business investment, particularly as UK interest rates remain high.

Leigh Himsworth, UK portfolio manager at Fidelity International, emphasized the need for significant investment in the country, but noted that financing costs needed to become cheaper in order to achieve this. Himsworth’s sentiment was echoed by other investors who believed tax breaks alone would not be enough to stimulate business investment.

Prior to the budget announcement, UK investors were concerned that a government seeking to boost its popularity ahead of the polls might engage in heavy spending that could increase inflation and interest rates. With interest rates already at a 15-year high of 5.25%, there were fears of further pressure on consumers and the Bank of England’s efforts to control services inflation.

However, the equity markets responded positively to Hunt’s measures aimed at boosting business. Shares in BT rose by 4.1% following the announcement, as the company is investing in a new fibre network. The domestically-focused FTSE 250 index outperformed the larger FTSE 100, rising by 0.7%.

Philip Shaw, chief economist for the UK at Investec, hailed the move to make full expensing on investment permanent as a major boost for UK industry and long-term macro outlook. Shaw stressed the importance of improving the country’s woeful productivity growth.

Despite the positive response in equity markets, UK stocks have underperformed compared to their European and US counterparts in 2023. The FTSE 100 index’s forward price-to-earnings ratio remains around half that of US stocks. Therefore, Hunt’s budget is not expected to have a significant impact on the overall market.

Thomas McGarrity, head of equities at RBC Wealth Management, maintained a cautious approach to UK domestic stocks, citing a high risk of stagflation in the UK economy. McGarrity believes the budget does not change this outlook.

In addition to business boosts, Hunt also froze alcohol duties until August 2024. Shares in brewer Fuller, Smith & Turner and pub operator Marston’s both experienced gains following the announcement.

However, the budget failed to deliver a substantial boost for the UK’s homebuilders. Instead, smaller measures were introduced to address bottlenecks in the planning system. Oli Creasey, property equity analyst at Quilter Cheviot, expressed skepticism about the effectiveness of these measures in addressing the affordability issue that is currently impacting the housing market.

Following Hunt’s statement, British bond yields rose as investors reacted to smaller-than-expected cuts to gilt issuance plans. The Debt Management Office announced plans to sell £237.3 billion ($295.7 billion) of gilts in 2023-24, slightly higher than the predicted £222.8 billion.

Despite the budget announcement, the pound struggled to gain momentum. It fell against the dollar after data indicated strength in the US economy and remained lower against the euro. Analysts noted that markets are still pricing in a 50% chance of a UK rate cut by June, suggesting that investors are not concerned about inflationary implications resulting from the budget measures.

Goldman Sachs strategists had warned ahead of the statement that a more substantial fiscal loosening at this stage could risk raising inflation. Overall, Hunt’s budget sought to strike a balance between stimulating the economy and maintaining market stability, although the impact on the economy and financial markets remains to be seen.

More detail via Reuters here… ( Image via Reuters )

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