Sir Doom and Mrs. Gloom

Immediately following the general election, there was a widespread sense of relief that a welcome period of political stability would be ahead.

Little did we know, the first 100 days would see numerous political gaffes. The latest being comments by Transport Secretary Louise Haigh, regarding a proposed £1bn DP World port investment and ahead of the government’s international investment summit. The spot light now falls on Chancellor Rachel Reeves and the October 30^th Budget. She must come up with the goods and set out a compelling and thought-out growth agenda.

Unfortunately, by stating it has inherited a £22bn black hole and that the country must expect a ‘painful’ Budget, the government looks to have knocked consumer and business confidence.

Sainsbury’s boss Simon Roberts has said that a lack of clarity has fuelled ‘continued caution in discretionary spending.’ Businesses are also reported to have put the brakes on recruitment, as they await clarity on tax and employment policy. There have also been rumours that employers’ National Insurance contributions might increase.

While those with the ‘broadest shoulders’ are expected to bear the brunt of likely tax increases, the uncertainty from capital gains to inheritance tax, is leading some to cash in ahead of the any changes.  Meanwhile, Rachel Reeves appears to be backtracking on several tax raising ideas, such as pension contributions, as it might impact public sector workers.

So, just how does Rachel Reeves plan to inject growth into the UK economy?

Following the disastrous Liz Truss episode, most households are aware that higher government borrowing means higher interest rates. Given the UK’s debt is 100% of GDP, the highest level since 1961, what will she do? Reports suggest up to £50bn could be freed in new borrowing by ‘moving the goal posts’ to boost investment. However, the IFS warned that if ‘the government is perceived to be making a change not for principled reasons but for opportunistic ones,’ it could result in higher interest rates. What would that do for consumer and business confidence?

The Chancellor said she wants to ‘invest, invest, invest’ to boost UK economic growth, but can she do this without disturbing financial markets, consumers, and businesses on 30^th October? Will it turn into a Halloween horror story? We must hope common sense prevails, but uncertainty ahead of the Budget is not helpful for the UK economy. Given Labour’s prime objective is to grow the economy, it’s not an encouraging start.

Rachel Reeves will need more than a new hairstyle to change public and market perceptions of a chaotic start as Chancellor.

 

What have we been watching?

Despite events in the Middle East and investors dialing back the likelihood of more aggressive interest rate cuts, the US market hit another record high last week. However, the US 10-year Treasury yield climbed above 4% while the 30-year US mortgage rate almost touched 6.4%. Chinese equities initially suffered major profit taking, before a fresh rally on further support for Chinese institutions to buy shares.

Markets are mindful of the fast-approaching US election – which remains a very close race. It was alarming therefore to hear Trump supporter Elon Musk, say ‘my view is that if Trump doesn’t win this election, it’s the last election were going to have.’ Putin, Iran, and China would no doubt welcome a contested US election – markets would not.

Just when it seemed events in the Middle East could not get much more dangerous, there were unconfirmed reports of a moderate earthquake in Iran that may have been caused by the underground testing of a nuclear weapon. Israel is focused on actions in Gaza and Lebanon, but will take retaliatory action against Iran at some point. Will it be against nuclear sites, oil facilities or some other targets? President Biden has said he does not want attacks on nuclear or oil, and given Israel needs long-term US military support, will this avert the worst outcome? Nonetheless, the risk remains of an all-out war in the Middle East.    

Just days after a speech by Taiwan’s president, in which he vowed to resist ‘annexation’ by Beijing and China is holding new war games, simulating an assault on the island. China described these as a ‘stern warning’ against those seeking ‘independence.’ Taiwan’s ally, the US is monitoring the drills off the coast of Taiwan. Meanwhile, the war in Ukraine grinds on with Russia continuing to make headway in the Donetsk region and carrying out  missile attacks on ports in Ukraine’s Odesa region.

The global tit-for-tat trade war continues. Following the EU’s vote last week to impose tariffs on Chinese EVs, China has announced plans to impose anti-dumping measures on French cognac, in a sign of escalating trade tensions between the EU and China.

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In the UK, market researcher Kantar said that annual grocery inflation picked up from 1.7% to 2% in September. The UK economy grew by 0.2% in August in line with expectations and aided by the construction sector. Ahead of the Budget, we should expect more unfavourable press leaks with the latest rumours being an increase in capital gains tax to 39% and the introduction of a tax on gambling companies.

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In the US, markets are continuing to try to assess the economic impact of a Kamala Harris or Donald Trump presidential election victory. Either way, consensus is suggesting significantly more US borrowing. Ironically, Harris is seen to be the more conservative, with a report from the Committee for Responsible Federal Budget suggesting Democrat policies would result in an extra $3.5trillion of spending, whereas Trump and the Republicans could spend as much as $7.5trillion. Following the recent US jobs data and comments from Federal Reserve (Fed) Chair Jerome Powell, the yield on 10-year US Treasury stock has climbed back above 4%.  The latest Fed meeting minutes revealed that the 0.5% interest rate cut was more finely balanced than previously thought, with some participants wanting a 0.25% cut. US inflation came in slightly above estimate in September with an annualised CPI of 2.4%, as did core inflation, which was 3.3%.

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Chinese equities initially succumbed to profit taking as the domestic market re-opened after the long holiday break, but then saw a fresh rally as the People’s Bank of China announced a new yuan swap facility to provide liquidity to Chinese institutional investors. Over the weekend, the Ministry of Finance press conference was light on specifics of further immediate stimulus measures, but provided strong forward commitment, and a large-scale local government debt swap was announced that was bigger than economists had expected. Ongoing stimulus seems necessary as deflationary pressures persist. Chinese inflation slowed to 0.4% in September, which was lower than expected, while factory prices dropped by 2.8%.

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Brent oil eased back to $79. Markets continue to hope that Saudi Arabia will increase output to offset any loss of Iranian production, due to Israeli military action. However, this assumes Iran doesn’t try to disrupt shipping through the Strait of Hormuz. Iran’s Houthi allies have previously attacked oil tankers using drones and missiles.

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Finally, yet another challenge for the Labour government. The Falkland Islands have insisted the UK government has no say on whether exploration of the Sea Lion oil basin, 150 miles north of the South Atlantic archipelago, should go ahead. This follows Energy Secretary Ed Miliband’s block on all new UK oil and gas licences. Sea Lion might hold as much as 1.2billion barrels of oil. No wonder Argentina is renewing its claims of sovereignty following Sir Keir’s recent deal with Mauritius on the Chagos Islands and the Diego Garcia airbase.

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Read Last Week’s Alpha Bites – A highly charged race to the White House

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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.