UK Budget Day: Gilt Yields, Global Markets, and Investor Sentiment

Budget Day Overview: Investor Concerns and Labour's Fiscal Stance

Budget Day: Gilt yields are higher, FTSE 100 weakest in almost two months. Investors are wary, Labour seems scary...but will it be all that bad? Rachel Reeves swapped a picture of Nigel Lawson for one of Ellen Wilkinson, a founding member of the Communist Party of Great Britain. You want to grab them and say, ‘Cheer up, it may never happen’…so gloomy and serious and earnest without any charm or humour. It’s roundheaded, puritanical stuff for a nation of Cavalier spirits.

For those in the markets and worried about stocks or bonds or the pound, it all boils down to whether the Budget says ‘sell UK’ or ‘buy UK’. This is not necessarily going to be straightforward. For the rest – will I pay more tax? Yes. Will it make me poorer? Yes. Will it make me less happy? Yes. For all the talk of investing for growth, growth, growth, there is not much verve or excitement about doing it.

Will it be worse than the KamiKwasi mini Budget? Truss and Kwarteng crashed the pound to its lowest since 1985, gilts sold off and emergency measures were required by the Bank of England. Both the Chancellor and PM fell. Will it be worse than the Omnishambles of 2012? Granny Tax and Pasty Tax – it was a gift for Sun headline writers. Will it be worse than Gordon Brown scrapping the 10p rate of income tax?

Gilt yields are the thing to watch – the UK 10yr is now yielding a bit more than the US 10yr Treasury by a couple of basis points. The spread with the German 10yr is back to around 200bps...levels only touched a couple of times in recent years...(ok there are other, more Germanic, reasons for this apart from perceptions of a lack of fiscal prudence in the UK) ...but if spreads widen it would reflect a doomster risk premium for the UK that we would assume is down to the Budget. Remember with the mini-Budget it was not so much the absolute level of the yield but the size and the speed of the move. This was pushing against an open door and the market is not the same as before.

Of course, one argument is that the Budget itself may be discounted already, and the focus is now on what it means for the Bank of England...but vibes are hard to ignore. And this Budget for the ages will be heavy on the vibes. Another argument goes that it will be way more upbeat and less punishing than signalled. This is wishful thinking, I think.

Sterling is back above $1.30 , with Treasury yields ticking down off their three-month highs above 4.30% to 4.24%. Jolts job openings indicated continued loosening in the labour market – openings back to pre-Covid levels and the quits rate is back to 2015 levels. However, this dip in Treasury yields may be very short-lived if Trump is about to win the election. We would see 4.5% pretty darn quick, and it could be back to 5% by the end of the year.

The pound’s one-week implied volatility is at its highest since March last year, which suggests traders are a little anxious about the Budget. But we won’t get to 40-year lows.

Budget Best Case: Market sees the Budget as being both pro-growth in the near-term (it cannot really price productivity gains 3+years from now) and fiscally responsible. This would be the ‘buy the UK’ trade. The worst case is that it’s both bad for growth in the near term – higher consumption and employment taxes AND fiscally irresponsible. Gee whizz, what’s your money on?

US Election Sentiment and Bitcoin Rally

On the US election – still going Trump’s way if the market is anything to go by. Bitcoin is testing its record high set in March, close to $74. Looks like the bulls will push it above March’s record high of $73,798. DJT rallied another 9% but is down pre-mkt...

Alphabet Leads Tech Surge as Earnings Season Continues

Strong cloud earnings growth boosted Alphabet. Shares added to an almost 2% gain on Tuesday with another 6% rally pre-mkt. Cloud revenues +35% is a handsome beat, driving overall revenues 15% higher year-on-year.

The Nasdaq Composite rose to a fresh record high as investors bet on monster tech earnings this week – Meta and Microsoft later today, Apple on Thursday. European equity markets are lower this morning.

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