Last Friday began with bombshell reports that Chancellor Rachel Reeves was set to ditch her well-publicised plans to raise income tax at the autumn Budget (26 November). The latest twist was made possible by indications that the updated series of economic forecasts would be better than expected, leaving a smaller deficit to be made up by tax rises, tweaks to income tax bands or spending cuts.
Still, the pivot from just ten days ago was extraordinary. Sterling fell sharply on the news before regaining its footing over the course of Friday, but stock markets plunged as accusations that the government were making plans borne of political necessity rather than fiscal reality were hurled.
The negative reaction was clear in the bond market. Over the course of just two days, yields on long-dated UK government debt rose by 0.2%, increasing borrowing costs to their highest level in a month shortly ahead of Budget Day. Debt investors will likely be playing close attention to the fiscal headroom after the chancellor’s speech.
Another sudden change of course topped off a dizzying week for the UK. While it would have to go some way to match the drama from last time out, inflation and retail sales figures due out this week will still make their impact felt.
The UK and the eurozone will also report significant manufacturing data on Friday – the highlight of a quiet week for those on the continent.
In the United States, President Trump is facing a crisis of his own with the imminent vote on the release of the Jeffrey Epstein files. FOMC minutes should provide a distraction when they are released on Wednesday evening, while existing home sales data will at least provide a window into what has become quite an opaque market.
And finally, Scotland is lining up its first sovereign bond issue since the Act of Union in 1707. The charmingly named “Kilts” will challenge UK gilt demand, but the first auction could be a while away. Scotland’s deputy first minister Kate Forbes said the initial bond might not be ready for another year or more.
Make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract or call your account manager on 020 7898 0541 to get started.
