Fixed Income Research & Macro Strategy (FIRMS) – 4X Global Research
- The British Chancellor of the Exchequer Rishi Sunak will on 3rd March, at around 12.30 UK time, present to the House of Commons the annual budget for the United Kingdom.
- The ruling Conservative Party has a significant working majority of 87 seats in the lower house of parliament and we expect the budget to pass pretty smoothly.
- While revenue and spending measures are very important for UK households and companies and the economy’s medium-term direction, our historical analysis suggests that that financial markets’ short-term reaction to the annual budget announcement is muted.
- In the past six budgets the Sterling NEER has on average depreciated about 0.1% on budget day while the FTSE 100 has closed up about 0.3%. In the five trading sessions following the 2015-2018 budgets, the Sterling NEER was on average unchanged while the FTSE 100 on average only gained about 0.45%, with little variability. The only expectation to this pattern was the March 2020 budget but acute global risk aversion, rather than the UK budget, drove Sterling and the FTSE 100 weaker in our view. If anything the reaction of short-end Gilts to previous budget announcements has been even more tepid.
- We see two inter-connected reasons for this. First, British governments in recent years have “pre-announced” most of their tax and spend measures to mainstream media, even if they often hold back a few vote-winning fiscal surprises to unveil on budget day.
- Second, budget announcements contain such a wide array of tax and spend measures that gauging their short, medium and long-run impact on the economy, Sterling, Gilts or equity markets remains an exercise in faith as much as rigorous analysis.
- This year’s “two-pronged transitional” budget will be no different, in our view. Policies largely outside of the Chancellor’s remit, including the pace of UK vaccination, will likely continue to be the main driver of domestic financial markets, including Sterling.
- However, expect Sunak to confirm both a (temporary) extension of Covid-19 related fiscal measures to support the economy during lockdown as well as modest tax hikes regardless of the government’s very low financing costs, in line with our September forecast.
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