A Taxing Question

A period of political stability has been positive for both the UK economy and stock market. The Bank of England has started to lower interest rates, which should help business confidence, while the UK housing market is showing signs of life. However, Labour’s honeymoon period is coming to an end.

PM Sir Keir Starmer has warned that the Budget in October will be ‘painful’ and that his government ‘must be prepared to be unpopular.’ The Chief Economist at the Institute of Directors (IoD) said that Labour’s talk of tax rises and employment rights has ‘dented confidence in the environment for business in the UK.’ The IoD’s Economic Confidence Index, which measures business leader optimism, hit a three-year high in July, but fell back in August.

The new government’s priority has been to grow the economy. However, it already appears to be targeting some business sectors, as it looks to plug the ‘black hole.’ Given this and its renewable energy ambitions, it has raised the windfall tax on the UK’s oil and gas companies operating in the North Sea. These pay 30% corporation tax on profits, a supplementary 10% rate and an Energy Profits Levy, which will rise to 38%. From November, the total tax rate on profits made by energy firms is therefore expected to rise to 78%. Offshore Energies UK (OEUK) has said that this planned increase will cause investment in the sector to plunge from £14bn a year to just £2bn by 2029, with some 35,000 jobs at risk. The Treasury has responded by highlighting the government’s new National Wealth Fund and Great British Energy, which it believes will create thousands of alternative jobs in renewable energy.

While PM Sir Keir Starmer and Chancellor Rachel Reeves have laid the blame for current challenges on their predecessors, the end of their honeymoon period is rapidly approaching with the October Budget. Confidence is a fragile thing and we must hope that the Budget does not snuff out the UK’s economic recovery before it has fully gained traction. UK companies will be looking for a business tax roadmap to stimulate investment, not deter it.

What have we been watching?

Another volatile week for markets as concerns of a possible US recession resurfaced. Weaker than expected US manufacturing ISM data made investors wary. AI chip giant Nvidia also fell materially, which then fed through into Asian chip manufacturers. Nvidia was hurt by news of an anti-trust investigation by the Department of Justice into its AI chip supply. The soft US manufacturing data was then followed by weaker than expected US Non-farm payroll numbers on Friday. Just to add to the uncertainty, the Bank of Japan warned that it might need to increase interest rates again. This raised fears of a further unwinding of the Japanese Yen ‘carry trade.’ Over the week, the US NASDAQ fell by almost 6%, leading UK equities lost 2.3% while Brent oil dropped by nearly 10%.

The 10-year US Treasury yield dropped to 3.7%. Investor attention is now focused on the Federal Reserve (Fed) – will it cut by 0.25% or 0.5% in September? Friday’s non-farm payroll numbers were not conclusive in the debate, which continues to rage. Futures which had been 50/50 pre-the numbers now see less chance of a 0.5% cut, while leading US investment firm Goldman Sachs now expects a 0.25% cut by the Fed in September, October and November. Sterling held around $1.31.

The unofficial global ‘Cold War’ continues. The Chinese government has launched an anti-dumping investigation into Canadian canola seed exports. This follows Canada’s recent imposition of 100% tariffs on Chinese EVs. Meanwhile, the Dutch government has added more semiconductor chip manufacturing equipment to the list of restricted exports to China matching US rules. ASML, based in the Netherlands is one of the leading suppliers to the global semiconductor chip industry.

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In the UK, BRC-KPMG retail sales for August rose by 1%, but looked soft with most of the growth driven by the grocery segment. Non -food sales have declined 1.7% in the three-months to August.

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The US ISM Manufacturing PMI for August came in below expectation at 47.2, with the sector contracting for a fifth month-in-a-row, while new orders dropped on the previous month. US non-farm payrolls came in at 142,000, which was below expectations, while the unemployment rate was in-line at 4.2%.

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The former Bank of Japan governor suggested that interest rates could move much higher. Markets are currently expecting Japanese interest rates to rise to 1% compared with the current 0.25%. The last increase sparked the reverse of the Japanese Yen ‘carry trade.’

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Brent oil dropped to $71 on concerns about global oil demand, even though OPEC+ agreed a delay to the increase in oil production planned for October.

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Finally, love or loath him, Jeremy Clarkson is good entertainment value. The UK pub trade, not surprisingly, is alarmed by news of Labour’s potential ban on smoking outdoors. Jeremy Clarkson has banned Sir Keir Starmer from his Cotswold pub – The Farmer’s Dog, together with James May!

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Read Last Week’s Alpha Bites – Energy prices are heating up again

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.