The FTSE 100 in London opened higher on Friday, eating into some of its post-UK budget weakness, while the pound gained some lost ground.
Eyes turn state side later, with US jobs data to come, before the Federal Reserve decision next week, and a presidential election on Tuesday.
Closer to home, Reckitt shares jumped on a favourable US legal ruling on infant formula. Airlines struggled as oil prices pushed higher, with traders mindful of geopolitical risks.
The FTSE 100 index traded up 41.35 points, 0.5%, at 8,151.45. The index is down 1.2% so far this week. Over the course of October, it lost 1.5%.
The FTSE 250 was up just 5.37 points at 20,394.33, and the AIM All-Share was down just 0.09 of a point at 737.01.
The Cboe UK 100 was up 0.5% at 817.76, the Cboe UK 250 rose 0.1% to 17,976.41, and the Cboe Small Companies was down 0.4% at 16,361.19.
In European equities on Friday, the CAC 40 in Paris was up 0.4%, while the DAX 40 in Frankfurt added 0.3%.
The pound was quoted at $1.2904 early Friday, rising from $1.2870 at the London equities close on Thursday. It had traded above the $1.30 mark before Wednesday’s budget announcement, however.
UK Chancellor Rachel Reeves is seeking to calm the markets and provide reassurance of the nation’s stability after her budget borrowing spree sparked jitters.
The budget increased state spending by almost £70 billion per year – a little over 2% of gross domestic product – funded by increased taxes and borrowing.
The scale of extra borrowing – around £32 billion a year on average – saw yields on government bonds increase as the market responded to the chancellor’s plans.
Reeves has played down the impact, saying that ‘markets will move on any given day’ and sought to offer reassurance of her commitment to ‘economic and fiscal stability’.
Paul Johnson, director of the Institute for Fiscal Studies, had warned that the ‘implausibly low spending increases’ in the budget meant there was a risk taxes would have to rise again if the economic growth Labour is depending on does not materialise.
But the chancellor told Channel 4 she would ‘absolutely not’ come back and raise taxes once again.
She said: ‘We have now set the envelope of spending for this Parliament, and we’re going to live within our means.’
The yield – or interest rate – on a 10-year gilt, an indicator for the cost of state borrowing, hit 4.568% on Thursday afternoon, the highest point since August 2023.
Nonetheless, Dutch bank ING said this was not a ‘mini-budget rerun’, referring to a fiscal announcement in 2022 which rocked sterling and led to then chancellor Kwasi Kwarteng leaving his post. Liz Truss, the PM at the time, resigned shortly after.
‘There are a few considerations to be made about the sterling market at the moment, the main one being that this is not a rerun of the post 2022 mini-budget market turmoil. While borrowing is set to rise substantially – and likely more than what the gilt market had priced in – tax rises mean fears of unfunded spending are kept in check. Incidentally, UK pension funds’ liability-driven investments are nowhere close to the leverage levels of 2022, when calls led to snowball panic gilt selling,’ ING said.
‘We suspect some of sterling’s drop was due to some positioning squeeze (remember GBP was the largest speculative long in G10 last week), and an extended severe depreciation would require a disorderly gilt selloff, which is not our base case. Our view is that sterling can drop a bit further as the readjustment to higher bond supply runs its course, but with GBP short-term swap rates having received a lift from the BoE repricing (only one cut expected in 2024 now), rate differentials can soon offer a floor to the pound.’
ING referenced LDIs which were at the heart of the post-mini-budget turmoil in 2022. A concern at the time was whether some LDI managers amassed enough liquidity to meet margin calls. These types of investment managers assist pension funds in managing risk.
A margin call occurs when an investor’s portfolio account falls below a required amount. In order to shore things up, they would typically need to deposit cash to get it back above the level required. A broker may also force the investor to sell assets. Managers had been forced into a quickfire sale of UK government bonds, putting more pressure on gilt prices after that mini-budget announcement in 2022.
The euro stood at $1.0861, up slightly from $1.0859 at the European equities close on Thursday. Against the yen, the dollar was trading at JP¥152.63, rising from JP¥152.45.
In the US on Thursday, Wall Street ended sharply lower, with the Dow Jones Industrial Average down 0.9%, the S&P 500 slumping 1.9% and the Nasdaq Composite plunging 2.8%.
In Asia on Friday, Tokyo’s Nikkei 225 tumbled 2.6%. In China, the Shanghai Composite closed down 0.2%, while the Hang Seng index in Hong Kong added 0.9%. The S&P/ASX 200 in Sydney lost 0.5%.
In London, Reckitt jumped 10%, the best large-cap performer in early trade. Its infant formula business Mead Johnson got a key legal boost in the US.
On Thursday, New York-listed Abbott Laboratories and Mead Johnson were cleared by a US jury over claims they hid risks their premature-infant formulas can cause a bowel disease that severely sickened a baby boy.
The ruling in the Whitfield case in the Missouri State Court was welcomed by Mead Johnson.
‘It demonstrates that the claims in this case were not supported by the science or experts in the medical community, and this case, like all the others brought by the plaintiff‘s bar, should be dismissed. This outcome illustrates that moving forward, plaintiffs face significant challenges due to the heavy burden they must meet in proving elements of their claims in every single case,’ the company said in a statement.
Airlines struggled, as oil prices rose and geopolitical uncertainty wears on. International Consolidated Airlines Group, the owner of BA, lost 1.4%. easyJet fell 1.3%. Wizz Air was down 2.3%.
Brent oil surged to $74.85 a barrel early Friday, rising from $72.67 at the time of the London equities close on Thursday.
‘The latest news on the wire suggests that Iran is preparing a response to Israel’s latest attack,’ Swissquote analyst Ipek Ozkardeskaya commented. ‘The geopolitical tensions have proved to be a temporary boost to oil bulls.’
However, the analyst added: ‘The global economic outlook and supply / demand dynamics remain comfortably bearish for oil. As such, price rallies are seen as good opportunities for the bears to strengthen their short positions. The latter not only triggers important selloffs as soon as tensions ease, but also limits the oil’s upside potential.’
Gold was quoted at $2,754.29 an ounce, up from $2,742.90.
Friday’s economic calendar has a UK manufacturing purchasing managers’ index reading at 0930 GMT, before the US jobs data at 1230.
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