By Garry White, Chief Investment Commentator at wealth manager Charles Stanley,
Financial markets showed no sign of being spooked by Labour Chancellor Rachel Reeve’s first Budget that will raise taxes by an estimated £40bn.
The yield on UK government bonds (gilts) rose in the weeks ahead of Labour’s first Budget in 15 years, partly driven by concerns about the potential for high levels of additional gilt issuance and an easing of the government’s fiscal stance, which would create more liquidity in the financial system.
But a lot of it will be attributed to uncertainty in the US, with UK gilts and US Treasury bonds continuing to move in lockstep. The Budget has sparked volatility in gilt yields (and will continue to do so), but gilts are very heavily influenced by global government bond moves, and therefore economic data from the US and Europe.
On the day the Budget was delivered, there was a sharp sell-off in the hours following the statement as markets digested the extent of fiscal easing announced by the Chancellor. The Office for Budget Responsibility (OBR) revised the bank and gilt rate upwards by 25bps over the forecast period, reflecting expectations of higher rates for longer. Furthermore, the anticipated additional £20bn of gilts issuance was skewed more to the long end of the yield curve than markets were anticipating, promoting a greater rise in longer-dated yields, and a steepening of the yield curve.
Movements in gilts are very heavily influenced by global treasury moves, particularly economic data from the US. Indeed, a lot of recent moves in bond markets can be attributed to uncertainty across the Atlantic ahead of the looming presidential election.
The rise in the minimum wage could be inflationary – which could be challenging to already sticky services inflation. However, the futures market is still pricing in another 25-basis-point cut from the Bank of England at its November meeting, so nothing has changed on this front either.
AIM shares relief rally
Shares in the Alternative Investment Market (AIM) rallied on relief that the inheritance tax break for shares quoted on the market was not completely abolished, as some had feared ahead of Ms Reeves’s statement. Rumours had swept the City that the allowance, which allows these shares to be inherited without being taxed if held for more than two years, would be scrapped in a move that could raise around £1.4bn.
Instead, it has been changed so only a 50% relief from inheritance tax will be applied, setting the effective tax rate at 20%. This was part of a host of inheritance tax measures that were unveiled, which are meant to raise as much as £2bn. Fully scrapping this allowance would have likely resulted in a significant plunge in the junior market.
