The FTSE 100 rose, the pound strengthened, while gilt yields fell on Wednesday as financial markets gave a guarded welcome to Rachel Reeves’s Budget.
The Chancellor increased taxes by £26 billion to bolster her fiscal headroom against future economic shocks, a move welcomed by analysts, although questions remain.
Modupe Adegbembo, of Jefferies, said that at first glance, the Budget looks “robust”.
“However, credibility hinges on execution,” Ms Adegbembo said.
“Many measures are heavily back-loaded, with the deficit higher in the near-term and only narrowing in the final years of the forecast when the income tax threshold freeze takes effect.
“Recent policy reversals underscore the risk of further U-turns.
“Sustained confidence will depend on delivering these commitments.”
The FTSE 100 index closed up 82.05 points, 0.9%, at 9,691.58. The FTSE 250 ended up 268.11 points, 1.2%, at 21,885.52, and the AIM All-Share closed up 1.17 points, 0.2%, at 743.26.
In her second budget, Ms Reeves announced that income tax thresholds would be frozen for an extra three years, raising £12.7 billion by fiscal 2030 to 2031, by far the biggest single revenue raiser.
Ms Reeves acknowledged the freeze would hit “working people” but said she was “asking everyone to make a contribution”.
The Chancellor spoke after the Office for Budget Responsibility (OBR) prompted chaotic scenes by releasing its assessment of the Budget, and the measures contained within, early by mistake.
Ms Reeves told MPs that the pre-Budget publication of the OBR’s document was “deeply disappointing and a serious error on their part”.
For its part, the OBR apologised.
“We apologise for this technical error and have initiated an investigation into how this happened,” the forecaster said.
Other changes announced include changes to salary-sacrificed pension contributions, increasing the tax rates on dividends, property and savings income, a new mileage-based charge on battery electric and plug-in hybrid cars and reforms to gambling taxes.
In addition, Ms Reeves announced a high-value council tax surcharge on properties worth more than £2 million and a further crackdown on tax avoidance.
The Government also announced measures to cut £2.3 billion from energy bills on average for the next three years by reducing some green levies that consumers pay to support renewable electricity.
The OBR forecast gross domestic product would grow by 1.5% this year, an increase from its earlier 1% forecast.
But it downgraded growth forecasts in 2026 from 1.9% to 1.4%, in 2027 from 1.8% to 1.5%, in 2028 from 1.7% to 1.5% and in 2029 from 1.8% to 1.5%.
Kallum Pickering, of Peel Hunt, said that for financial markets, the Budget is “tolerable”, with no major shifts in rates, Bank of England pricing, or inflation expectations.
“But the danger comes with the back-loaded nature of the Budget,” he said.
“While the Government has failed to deliver any serious positive surprises, it seems to have managed to avoid any nasty surprises too.”
“Still, we need to be a little cautious. Because the major tightening measures are back-loaded, balancing the books will require the Government to match its plans with action and hope that the economy does not undershoot the OBR projection in a major way,” he said.
Andrew Wishart, at Berenberg, noted that the Chancellor was spared from having to make further difficult decisions by a far better set of fiscal forecasts than anyone expected.
Before taking into account the policy changes announced on Wednesday, Ms Reeves was still on course to meet her primary fiscal target of covering all day-to-day spending with tax revenue in 2029-30 with £4 billion to spare, he noted, “a major positive surprise” to the consensus view that she would fall short by some £10 billion to £20 billion.
Sterling rose after the Budget, while bond yields eased.
The pound was quoted higher at 1.3232 US dollars at the time of the London equities close on Wednesday, compared to 1.3183 dollars on Tuesday.
The yield on the UK 10-year gilt was at 4.43% on Wednesday at the time of the London close, down from 4.49% on Tuesday.
Mr Wishart suggested the fall in yields and strengthening of the pound is probably more due to the “waning of political risk rather than any changes to official forecasts or the policy package”.
“Taking the chance offered by a helpful official forecast to avoid hard decisions has increased the Chancellor’s and Prime Minister’s chance of political survival,” he said.
While Tom Stevenson, of Fidelity International, said Ms Reeves can “feel relieved” about the market reaction.
“The steadiness of the market response suggests that investors were reassured by the overall fiscal approach,” he said.
In European equities on Tuesday, the CAC 40 in Paris closed up 0.8%, while the DAX 40 in Frankfurt ended 1.0% to the good.
Stocks in New York were higher. The Dow Jones Industrial Average was up 0.8%, as was the S&P 500 index, while the Nasdaq Composite advanced 0.9%.
The yield on the US 10-year Treasury was quoted at 4.01%, unchanged from late on Tuesday. The yield on the US 30-year Treasury was quoted at 4.66%, widened from 4.65%.
The euro stood higher at 1.1598 dollars on Wednesday, against 1.1569 dollars on Tuesday. Against the yen, the dollar was trading higher at 156.35 yen compared to 156.13 yen.
Back in London, banks extended Monday’s gains as the sector was spared further tax pain by the Chancellor.
Lloyds Banking Group rose 3.4%, Barclays gained 3.2% and NatWest advanced 2.3%.
But changes in gambling duty saw William Hill owner Evoke slide 18%, although Ladbrokes owner Entain, which has a more diverse global exposure, recouped initial losses and traded 3.4% higher.
Oil and gas company shares fell as the UK Government confirmed the windfall tax will remain in place until March 2030, unless oil and gas prices fall below a certain level before then.
There had been hope in the sector that the expiry date for the windfall tax would be brought forward.
Serica Energy fell 4.1%, and Harbour Energy slid 4.7%.
Brent oil was quoted at 62.41 dollars a barrel at the time of the London equities close on Wednesday, up from 61.71 dollars late on Tuesday.
Gold was quoted at 4,163.25 dollars an ounce, up against 4,132.40 dollars.
The biggest risers on the FTSE 100 were St James’s Place, up 68.50 pence at 1,361.00p, Fresnillo, up 128.00p at 2,604.00p, Endeavour Mining, up 158.00p at 3,462.00p, Marks & Spencer, up 14.80p at 344.20p and JD Sports Fashion, up 2.90p at 76.74p.
The biggest fallers on the FTSE 100 were Berkeley Group, down 114.00p at 3,726.00p, Hikna Pharmaceuticals, down 40.00p at 1,560.00p, Kingfisher, down 6.70p at 303.20p, Sage, down 22.50p at 1,064.50p and Compass Group, down 37.00p at 2,371.00p.
Thursday’s economic calendar has eurozone consumer confidence figures. Financial markets are closed in the US for Thanksgiving Day.
Thursday’s UK corporate calendar has half-year results from motor and cycle retailer Halfords and water utility Pennon Group.
Contributed by Alliance News.
