FTSE, gilts and sterling all hold their ground as Chancellor prepares for Brexit and the end to austerity

The FTSE 100 had already enjoyed a good day before Chancellor of the Exchequer Philip Hammond started speaking, since the index had gained more than 100 points to recapture the 7,000 mark.

The Chancellor may be gratified to see a green screen although how much of it is to do with him and the policies outlined in today’s Budget is a matter for debate, as stocks sought to rebound from last week’s turbulence. The FTSE 100 was up by 113 points when Mr Hammond stood up and ended the trading day with a 95-point gain.

Macroeconomics

Perhaps better indicators of the reception given to Mr Hammond’s red box come from the currency and bond markets.

By the time Chancellor had stopped speaking, the pound stood at $1.2794 against the dollar and €1.1246 against the euro. That compares to overnight closes in the US of $1.2828 and €1.1251 and today’s trading leaves the British currency near its 2018 lows against the greenback but in the middle of its recent range against the single currency.

Italian Government bond yields are rising again

Source: Refinitiv data

Meanwhile, the 10-year Gilt yield had moved to 1.40% compared to Friday’s close of 1.38%. That leaves the borrowing cost benchmark near its-year lows, which will at least help Mr Hammond when it comes to managing the annual interest bill of £51.6 billion a year.

Italian Government bond yields are rising again

Source: Refinitiv data

That slight increase may again have as much to do with an increase in broader market risk appetite after last week’s panicky trading, which saw haven assets such as Government bonds, gold and defensive equity sectors such as tobacco do relatively well, as previously go-go areas such as technology stocks and US equities more generally take a pasting.

Both the pound and the bond market may have warmed to the lower annual deficit numbers announced by Mr Hammond, who will probably be relatively pleased to see the calm response to today’s statement. After all, it was originally flagged as a bit of a holding statement ahead of 30 March 2019 when Brexit is due to come into effect.

The Government now expects to borrow just £25.5 billion in the year to April. That is down from a prior estimate of £37 billion and is the lowest annual deficit since 2002’s £23.8 billion overspend.

Italian Government bond yields are rising again

Source: ONS, HM Treasury, Office for Budget Responsibility

This will help the Chancellor fund the Prime Minister’s promise to end austerity, with a particular focus on the NHS, without necessarily having to turn to tax increases the fund the spending. Mr Hammond’s room for manoeuvre is still relatively limited owing to the aggregate £1.8 trillion public deficit which continues to creep up very slowly, owing to the way in which Government spending continues to exceed the revenues raised by tax.

Sluggish growth forecasts hardly help the Chancellor’s revenue-raising activities. The Office for Budget Responsibility continues to forecast trend GDP growth of just 1.3% to 1.6% a year, although the 2019 estimate represents an upgrade.

Italian Government bond yields are rising again

Source: Office for Budget Responsibility

That may fuel calls for more expansive fiscal policies, such as those outlined by Labour’s Jeremy Corbyn and John McDonnell, who argue that more should be done to spark growth, via its £49 billion tax-and-spend plan and 10-year, £250 billion infrastructure programme.

With growth looking modest, at least for now, tax increases would play a role here, a policy clearly explained by the Leader of the Opposition and the Shadow Chancellor.

Wide-ranging tax increases are trickier political ground for the Conservatives. Any such move would break a manifesto promise and would be hard to achieve for a Government which has no official majority in Parliament.

To quote George Bernard Shaw, ‘A Government that robs Peter to pay Paul can always rely on the support of Paul.’ But what Peter thinks of that is more of an open question and both Mr Hammond and Mrs May will already be diligently counting their Peters and Pauls with a General Election in mind, even if that is not officially due until 5 May 2022.

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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