The Budget Aftermath: Market Reactions and Economic Implications

As the UK government unveiled its latest budget, the financial landscape was rife with anticipation and speculation. In the lead-up to the announcement, Chancellor Rachel Reeves faced criticism for hinting at various policy changes, which some argued undermined the element of surprise typically associated with budget announcements. However, this signaling may have mitigated market volatility, as many of the proposed steep tax increases were largely anticipated.

Initial Market Reactions

The immediate aftermath of Reeves’ budget speech saw the British pound dip against the dollar, falling by 0.5% at the onset before recovering its losses by the conclusion of her address. This fluctuation reflected investor sentiment as they processed the implications of the budget. The FTSE 100, which comprises the largest 100 companies listed on the London Stock Exchange, experienced a decline of approximately 0.7%. This index is heavily influenced by international factors, making it a barometer for the UK’s perceived investability on the global stage.

In contrast, the FTSE 250, which is more representative of domestic businesses, showed resilience, climbing by 1% after a flat start. This divergence in performance highlights the varying impacts of the budget on different sectors of the economy.

A Closer Look at Sector Performance

The AIM index, which includes smaller listed companies, surged nearly 4%, marking its largest single-day gain since April 2020. This rally was largely attributed to the government’s decision to reduce business property relief on AIM-listed shares to 50%, rather than eliminating it entirely, which alleviated investor concerns about the potential impact on smaller firms.

Several sectors emerged as clear winners following the budget announcement. Pubs, homebuilders, and gambling companies saw significant gains. Notably, betting giants Entain and Flutter Entertainment led the FTSE 350 with increases of 7% and 5.6%, respectively. Homebuilder stocks also rallied, with a group of UK homebuilders rising by 3.5%, marking their largest one-day gain since May. Crest Nicholson, Persimmon, and Taylor Wimpey all posted impressive gains, further underscoring the positive sentiment surrounding the housing market.

Pub stocks benefited from Reeves’ announcement of reduced duties on alcoholic beverages sold in pubs, with companies like Wetherspoon, Marston’s, and Mitchells & Butlers seeing their shares rise between 3.7% and 7.2%.

Market Sentiment and Future Outlook

Jonathan Unwin, UK head of portfolio management at Mirabaud Wealth Management, noted that the markets appeared somewhat exhausted leading into the budget, suggesting that the initial positive reactions may have stemmed from the chancellor’s more fiscally conservative approach than anticipated. He emphasized that while the tax burden on UK corporations is set to increase, much of this was already factored into market expectations, indicating limited potential for significant price movements directly related to the budget.

In the broader context of the UK’s equity markets, global themes such as the upcoming US election and ongoing earnings season are likely to play a more significant role in shaping sentiment in the near term.

Gilt Yields and Government Borrowing

The reaction in the gilt market was particularly noteworthy. Gilt yields, which serve as indicators of confidence in the UK’s economic outlook, exhibited volatility during the budget speech. Initially, yields fell, suggesting a positive reception to the budget. However, by mid-afternoon, they surged unexpectedly, with some analysts attributing this to a delayed market reaction as investors digested the implications of the budget. Others pointed to a concurrent spike in US bond yields as evidence that the shift was not solely budget-related.

As a result, government borrowing costs reached their highest levels in nearly a year, following what has been described as the most substantial tax-raising budget on record. Hal Cook, a senior investment analyst at Hargreaves Lansdown, explained that bond markets are forward-looking and had already priced in the anticipated increase in government debt. This led to the initial drop in yields, which later reversed as the market recalibrated its expectations.

Interest Rate Projections

The mixed market reactions have also influenced expectations regarding interest rates. According to Refinitiv data, the likelihood of a 0.25% cut to the bank rate in November has decreased from approximately 94% to around 83% following the budget announcement. The Office of Budget Responsibility (OBR) echoed this sentiment, projecting that increased borrowing—estimated at £32 billion annually—would likely result in interest rates being 0.25 percentage points higher than previously anticipated in the coming years.

Conclusion

The unveiling of the UK budget has set off a chain reaction across various sectors of the economy, with mixed reactions from the markets reflecting the complexities of the current economic landscape. While larger corporations may face a heavier tax burden, smaller firms and specific sectors have found reasons for optimism. As the dust settles, investors and analysts alike will be closely monitoring the implications of the budget on the broader economic outlook, interest rates, and market sentiment in the months to come.