How new UK finance minister's first budget could affect markets
EWU•John Healey is due to deliver his first budget on Wednesday as rising global borrowing costs have reduced the UK's fiscal buffer from £24 billion in March to an estimated £8.5 billion to £20 billion. Investors are watching borrowing plans and possible tax changes, including reportedly higher taxes on banks and gambling duties.
1. Bond market pressure
A global bond selloff has raised the government's interest bill and eroded its fiscal buffer. Britain's 10-year borrowing costs have risen almost 30 basis points since early September to around 5.33%, while economists estimate the buffer is now between £8.5 billion and £20 billion. Investors will watch borrowing plans for the next 12 months and seek reassurance on fiscal discipline.
2. Possible tax changes
Media reports say Healey may increase the 3% surcharge banks pay on profits. HSBC, NatWest, Lloyds and Barclays shares are down between 6% and 11% so far in October. Gambling companies are also watching for a possible increase in Machine Gaming Duty; it could rise by five percentage points to 25%, below the 40% increase Labour politicians had pushed for.
3. Sterling and builders
Sterling is at a 17-month peak against the euro, while currency options show little sign of traders seeking protection from budget-related volatility. Housebuilder shares have given back almost all the gains made after the government confirmed a first-time buyer support scheme, as higher bond yields and mortgage rates have weighed on the sector.
