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FTSE 100 Live: Pound tumbles under $1.09 and investors dump government bonds after mini budget

By
23 September 2022
T

he pound fell under $1.09 after Kwasi Kwarteng delivered his growth-focused mini-budget with consumer confidence at a record low and markets under pressure after more big interest rate rises.

Billions of pounds of increased spending and tax cuts came in the chancellor’s statement, but economists have warned the impact for inflation could result in rates having to stay higher for longer. Investors moved out of UK government debt after the speech, sending yields sharply higher, with two-year government borrowing costing it almost 4%.

Earlier today it emerged that GfK’s long-running consumer confidence index fell five points in September to minus 49, the worst score since records began in 1974.

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Wall Street fall adds to FTSE 100 pressure

Fears over the impact of more big interest rate hikes in the US continue to dominate markets after another big fall for Wall Street last night.

The S&P 500 index declined 0.8% and the Nasdaq lost 1.4%, with dealings in futures markets pointing to another negative session when trading resumes this afternoon.

The potential for a hard landing in the US economy has increased after Federal Reserve chair Jerome Powell vowed to do everything possible to tackle inflation. Traders now see a Fed funds rate of 4.5%-4.75% by early 2023.

European markets were also impacted yesterday as the FTSE 100 index closed at its lowest level in two months after losing 1.1% at below the 7200 mark. The FTSE 250 index, which is already in bear market territory, fell 2%.

Sterling weakened to $1.12 following this week’s flurry of central bank meetings, which saw the Federal Reserve increase by 0.75% and the Bank of England by 0.5% to 2.25%.

There had been speculation that the Bank might increase by 0.75%, but economists think such a move could still happen in November if today’s mini-budget makes it more likely inflation stays higher for longer.

CMC Markets expects an unchanged start for the FTSE 100 index today.

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Consumer confidence at record low

GfK’s consumer confidence index today posted its worst reading since records began in 1974 as the cost of living crisis continues to bite.

The headline figure fell five points in September to minus 49, the fourth time in the last five months it has been at an all-time low.

Confidence in personal finances over the coming year fell nine points to minus 40 and confidence in the economy over the next 12 months by eight points to minus 68. The major purchase index, an indicator of confidence in buying big ticket items, was unchanged at minus 38.

GfK director Joe Staton said: “Consumers are buckling under the pressure of the UK’s growing cost-of-living crisis driven by rapidly rising food prices, domestic fuel bills and mortgage payments. They are asking themselves when and how the situation will improve.

“Today’s mini-budget, and the longer-term agenda to drive the economy and help rebalance household finances, will be the first major opportunity to deliver that improvement.”

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FTSE 100 steady, Smiths Group up 3%

The FTSE 100 index is near to its opening mark, despite weaker oil stocks BP and Shell and declines of 1% for Lloyds and NatWest.

The top flight, which retreated 1% yesterday following the Federal Reserve interest rates decision, stood 8.82 points lower at 7150.70.

Smiths Group, the industrial conglomerate, led the risers board after full-year results featured a 5% increase in dividend and forecast for revenues to grow by more than 4% this year. Shares lifted 3% or 37.5p to 1508p.

Other stocks up by more than 1% included GSK and the drugs giant’s former consumer healthcare division, Haleon.

Marks & Spencer shares rose 1.9p to 112.3p but the wider FTSE 250 index dipped 15.51 points to 18,316,18.

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Market recap as Kwasi Kwarteng takes to the dispatch box

Here’s where the market stands as chancellor Kwasi Kwarteng begins his mini budget speech.

FTSE 100: 7,097.81 -61.71 (-0.86%)

FTSE 250: 18,254.69 -77.00 ( -0.42%)

GBP/USD — $1.115 -0.009 (-0.87%)

30- year gilts yield: 3,760

10-year gilts yield: 3,487

2-year gilts yeild: 3,486

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Energy plan will reduce inflation by 5%, says Kwarteng

The government’s energy plan will bring inflation down by 5%, Kwasi Kwarteng said in his budget speech.

The total cost of the scheme, which will subsidise enegy bills for six months from October, is set to reach £60 billion, Kwarteng said.

“The heavy price of inaction would have been far greater than the cost of these schemes,” he added.

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Kwarteng drops banker bonus cap

Chancellor Kwasi Kwarteng has confimed the government will scrap the banker bonus cap.

The cap restricts bonus pay to a maximum of 200% of base pay. Kwarteng said the existing rules never set a maximum cap on total banker pay.

“A strong UK economy has always depended on a strong financial services sector,” he said.

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Planned corporation tax hike scrapped, Kwarteng confirms

A planned hike in the rate of corporation tax is to be scrapped, chancellor Kwasi Kwarteng has said, keeping the rate at 19%, the lowest rate in the G-20.

A planned drop in the Annual Investment Allowance tax relief to £200,000 will also be scrapped, while increase to tax-advantaged share schemes, including the Company Share Option Plan, will increase.

Kwarteng said the move was “a crucial step to make this a nation of entrepreneurs.”

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Top rate of tax scrapped, stamp duty threshold increased

The 45% top rate of income tax has been scrapped, Kwasi Kwarteng has confirmed, meaning the highest rate of income tax is now 40%.

A planned cut in the basic rate of income tax to 19% has been brought forward.

Meanwhile, the £500,000 stamp duty threshold for first time buyers has been increased to £625,00, taking an estimated 200,000 home owners out of paying stamp duty altogether, Kwateng said.

“For too long in this country we have indulged in a fight over redistribution. Now we need to focus on growth,” Kwarteng said.

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City reacts to Kwarteng’s mini-budget

The City had a mixed reaction to Kwasi Kwarteng’s budget speech, with the chancellor’s focus on growth welcome but the credibility of his plans under close scrutiny.

Tim Mills, Managing Partner at ACF Investors, said: “In a statement with a very welcome focus on growth and the future of UK economic success, the chancellor has given UK startups a major boost by guaranteeing the future of the EIS scheme, which provides £1.7bn a year in funding for some of the UK’s highest-growth businesses.

“Besides funding, fast-growing companies and their investors need one thing above all else – a consistent landscape of support. By providing clarity around this vital source of funding, UK startups have a much clearer runway for growth over the coming years. At a time of economic turmoil, the impact of that assurance cannot be understated.”

But Roger Clarke, CEO of Real Estate Stock Exchange, IPSX, said “In the absence of cheap credit, the government is attempting to pull all levers at its disposal to support household finances and consumer spending.

“It’s hoped that the widespread deregulation and cuts to headline tax rates will release a wave of investment and consumption, although there is much debate around the credibility of this loose fiscal approach,” he said.

Andrew Aldridge, Partner at Deepbridge Capital, said: “The new Chancellor’s overt commitment to the Enterprise Investment Scheme and Seed Enterprise Investment Scheme could well be the single most important decision he takes during his time at 11 Downing Street.  These world-class propositions are fundamental to the creation of the innovative companies of tomorrow.”

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Investors dump UK government debt after chancellor’s ‘mini-budget’, sending yields up

Investors moved out of UK government debt, sending yields on gilts higher, as the government’s revised tax and spending plans included cuts to National Insurance and income tax.

The yield on benchmark 10-year gilts rose to 3.676%, up from 3.487% before Kwasi Kwarteng spoke in the House of Commons. The yield on short-term, two-year debt rose to 3.691%, up from 3.486%, a notably sharp response.

London’s FTSE 250  share index moved up off day-lows but did not turn positive, trading down 20 points overall at 18311.36, down 0.2%. The index is home to some of the biggest names that earn the bulk of their revenue from the UK economy, and while City expert welcomed some measures, there was concern that more action will be needed as the economy slows

Mike McCudden, the chief executive of CrowdX, said: “This government has some major issues to tackle right now and it was great to hear of the extension to the Enterprise Investment Scheme, which was due to expire in 2025, but deploying more nuanced fiscal policies – not just broad-based, headline grabbing slogans - will be critical if the worst is to be avoided.”

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