By Michael Brown Senior, Research Strategist at Pepperstone
DIGEST – Sentiment remained solid yesterday, with stocks gaining ground once more, while UK assets also firmed, despite a shambolic Budget Day. Today, with the US away for Thanksgiving, a barren docket awaits.
WHERE WE STAND – I can safely say that, in getting on for a decade of doing this, I’ve never seen what we saw yesterday.
In fact, I don’t really know how to put into words just how significant, and utterly shambolic, it was, that the Office for Budget Responsibility managed to release the entire ‘Economic and Fiscal Outlook’, containing all of the policies to be announced in the Budget, about an hour before (an understandably incredulous) Chancellor Reeves stood up at the despatch box. Although, for a budget whose policies had been extensively leaked and briefed to the press for months, this was just the final cherry on top of the cake, in many ways.
While the early release was little short of staggering, the Budget itself didn’t have much in it that hadn’t been extensively ‘pitch rolled’ beforehand. I shan’t list out the ‘smorgasbord’ of tax hikes here, else I’d be writing ‘war and peace’ this morning, but the nub of it all is this – about £26bln of back-loaded tax increases, coupled with over £10bln of front-loaded spending hikes, that together with the OBR’s updated economic assumptions, boosts headroom against the fiscal rules to £22bln, considerably higher than the £9.9bln buffer that was present in the spring.
As for those updated economic assumptions, the OBR now foresee slower growth in each of the next five years compared to the last forecast round six months ago, driven in part by the expected downgrade, to the tune of 0.3pp, to the forecast for trend productivity growth. Furthermore, the OBR themselves noted that there were no measures contained within the Budget that are likely to boost economic growth, thus leaving present the real risk that the ‘doom loop’ continues, and that Reeves (or her successor) are back for more tax hikes this time next year.
While UK assets took things in their stride yesterday – the FTSE rallying, cable clearing the 1.32 figure, and the 30-year Gilt yield falling about 10bp on the day – I’d argue that much of those moves amount to short covering, and little else. Once the dust settles, the ugly and unsustainable policy mix of having front-loaded spending increases, but back-loaded tax hikes, should exert renewed pressure, particularly if political risks were to resurface, even if the PM and Chancellor will now try to muddle through until the May local elections.
Away from the shambolic UK Budget, markets enjoyed another risk-on day as we cruised into Thanksgiving. Stocks, as such, gained ground on both sides of the Atlantic, with the recent wobble seemingly now firmly in the rear view mirror, as dip buyers have again wrestled back control, with most major benchmarks having reclaimed their respective 50-day moving averages, and spoos comfortably back above 6800.
I feel like it’s too early to start throwing the words ‘Santa Rally’ around, but we do seem to be setting up for further gains into year-end, with tailwinds aplenty from the increasingly loose monetary backdrop, calmer trade tone, FOMO/FOMU flows, resumption of corporate buybacks, plus the robust earnings backdrop and underlying economy. I still haven’t given up hope of seeing 7,000 before the year is out!
Outside of the equity space, the buck slipped for the second day running, importantly seeing the DXY pull back under its 200-day moving average for the first time in a week. As a dollar bull, it is a little concerning that the market has lacked the conviction in recent sessions to build upon the gains that we made in the middle of the month, though I suppose this could well speak more to the incredibly low levels of both implied and realised vol that we continue to see across the FX space, as opposed to the bull case for the buck having become invalid. For instance, initial jobless claims fell to their lowest level since February last week, per yesterday’s data, potentially settling some jitters over the state of the labour market.
In fact, given the continued unattractiveness of almost everything else in G10, it’s a dip that I’d be looking to buy, albeit not until Monday, as trading in holiday-thinned conditions over Thanksgiving is little more than a fool’s errand.
LOOK AHEAD – With today being Thanksgiving, and without wishing to tempt fate, conditions are likely to be rather uninspiring for the remainder of the week, amid not only a host of market closures, but also much thinner than usual liquidity, and light volumes.
Today’s data docket is certainly an incredibly barren one, with only the release of minutes from the October ECB meeting of note. Besides that, we’ll obviously watch continued fallout from yesterday’s Budget, and be on guard for any unexpected headlines, though I for one won’t be expecting too much by way of fireworks.