‘Quaint’ Budget not the main focus for City traders this autumn
The UK’s “quaint” Budget will not be the biggest event for City traders this autumn, despite some bleak warnings of a bond market meltdown, analysts have said.
Investors have pointed to rising gilt yields as a sign that markets are getting increasingly nervous as the Budget approaches. In particular, traders are concerned that Chancellor Rachel Reeves might reform the fiscal rules to allow for billions of pounds of extra borrowing.
However, many analysts said the Budget would pale into insignificance next to the US election, the results of which will be announced about a week later.
“Ultimately when you’ve got the Committee for Budget Responsibility forecasting Harris to add $3.5 trillion to US debt and Trump $7.5 trillion it does make getting agitated about generating £16bn extra headroom a little quaint,” Gordon Shannon, a portfolio manager at TwentyFour Asset Management said.
The polls suggest that it is too close to call between Harris and Trump. Whatever happens, the UK economy will feel the effects.
Trump has pledged to put a 60 per cent tariff on imports from China and a 10-20 per cent tariff on all other imports. He has also promised to carry out the “largest domestic deportation operation in American history”.
Paul Dales, chief UK economist at Capital Economics, said the UK economy would feel the consequences of a Trump victory.
“Should Trump win and reduce immigration and raise import tariffs, that would lead to slower US economic growth than otherwise and higher US inflation and US interest rates,” he said.
“That combination could possibly raise US Treasury yields and drag up UK gilt yields as a result”.
Lloyd Harris, head of fixed income at Premier Miton, said the US election was “potentially seismic” for markets given the unpredictability of a Trump presidency.
This stands in pointed contrast to the Budget. Kallum Pickering, chief economist at Peel Hunt, said
“Beyond a possible modest boost coming from an increase in public investment, I doubt I’ll change my forecasts much as a result of the changes in the budget – since we already know more or less what’s going to be in it,” he said.
Similarly, Dales pointed out that investors were already fairly aware of “the size and shape” of potential policies in the Budget, which helped to reduce uncertainty.
“The direct but more certain effect on the UK markets from the UK Budget could prove to be smaller than the indirect and more uncertain effect from the US election,” he said.