UK markets move on swiftly from UK Budget

Market moves on swiftly from Budget

Summary

The era of austerity might be “coming to an end”, but given the circumstances, it’s not coming to a swift end, so the Budget’s market impact was therefore almost invisible.

A quantum of boredom

A quantum shift was not expected. The Chancellor was sure to make much of additional leeway implied by OBR forecasts that were fractionally more confident. But alongside already leaked tweaks, including new NI incentives and increased annual business investment allowance, the Budget only nodded to what Philip Hammond has long recognised as the unfortunate financial impact on individuals of straitened fiscal conditions. A forecast 30% rise in public investment over the next five years amounts to £245bn of the £817bn estimated total spending in 2019. As such, the theoretical impact only amounts to a mild-to-moderate spending boost. The additional £500m allocation towards Brexit preparations was also well within the range of market forecasts so the reaction was neither here nor there.

No help for sterling

Sterling against the dollar has essentially returned to where it was immediately before the Chancellor began speaking, after dipping slightly during his delivery. Sterling was last almost at an 8-week low of $1.2809. It will probably receive more impetus from this week’s pivotal ‘risk events’ of the Bank of England policy statement and, reflexively, from the U.S. monthly employment report, due on Friday, depending on the effect on the dollar.

Stocks rise regardless…except defence

As for London shares, the timing of the speech so late in the trading day logically shortened time available for impact. Even then, it was difficult to perceive how the Budget impinged on the market either way. UK stock indices joined those in Europe and the U.S. on a rebound from last week’s falls. The one clear British industrial sector singled-out in the speech as a recipient of increased expenditure was defence. But the rise was a very modest £1bn over two years. Furthermore, it is aimed solely at the programme that will replace Vanguard ballistic submarines—Dreadnought. Hence the most comprehensive gauge of that industry actually underperformed the wider market on Monday with a fall of 1.3%. That suggests very specifically disappointed investor expectations. The sector’s slide compared with a 1.2% rise by both the benchmark FTSE 100 index and its more domestically orientated FTSE 250 mid-cap gauge.

With a Spring Statement that could be requisitioned for a “fiscal event”, to use Hammond’s words, if necessary, (i.e. a more substantive Budget), and a compressed timetable of Brexit inflection points over the next few months that will have further-reaching impact, the market has moved on from Monday’s Budget already.