Traders and investors gave an initial thumbs up to the decision by new UK Chancellor Jeremy Hunt to reverse ‘almost all’ of the tax cuts announced in last month's mini-budget, with stocks, bonds and the pound all rising or holding earlier gains midday Monday.
‘UK financial markets reacted in a generally positive fashion to the government's dramatic policy U-turn this morning, with sterling initially rallying and gilt yields down modestly,’ said Matthew Ryan, head of Market Strategy at financial services firm Ebury.
‘Almost all of the sweeping tax cuts announced a mere three weeks ago have now been scrapped, with the notable expectations of the cuts to National Insurance and stamp duty. This should go some of the way to restoring a semblance of confidence in UK assets and removes much of the 'mini-budget' risk premium attached to the pound. ’
Hunt also will fast-track billions of pounds of cost savings in an attempt to get the public finances back on track and stabilise financial markets after weeks of turmoil in the wake of former chancellor Kwasi Kwarteng's mini-budget.
He will address members of Parliament in a statement to the House of Commons later in the afternoon.
The FTSE 100 index was up 37.48 points, or 0.6%, to 6,896.27 midday Monday.
The FTSE 250 was up 177.78 points, or 1.0%, to 17,210.60. The AIM All-Share edged down 0.22 of a point to 779.58.
The Cboe UK 100 rose 0.3% to 689.08, the Cboe UK 250 climbed 0.7% to sit at 14,680.35 points at midday. The Cboe Small Companies traded 0.1% lower at 12,269.87.
In European equities on Monday afternoon, the DAX 40 in Frankfurt was up 0.7%, while the CAC 40 in Paris was up 0.6%.
In an emergency statement, Hunt said: ‘We will reverse almost all the tax measures announced in the growth plan three weeks ago that have not started parliamentary legislation.
‘So whilst we will continue with the abolition of the health and social care levy and stamp duty changes, we will no longer be proceeding with the cuts to dividend tax rates, the reversal of off-payroll working reforms introduced in 2017 and 2021, the new VAT-free shopping scheme for non-UK visitors or the freeze on alcohol duty rates.’
The basic rate of income tax remains at 20% for now.
Hunt said his tax cut reversals will raise some £32 billion a year as part of efforts to get the public finances back on track.
In addition, the energy bills relief scheme in its current form will not continue beyond April, he said.
‘It would be irresponsible for the government to continue exposing the public finances to unlimited volatility in international gas prices. A Treasury-led review will therefore be launched to consider how to support households and businesses with energy bills after April 2023,’ Hunt said in a statement.
The pound was quoted at $1.1264 midday Monday UK time, up from $1.1235 at the London equities close on Friday. The pound had spiked to $1.1330 shortly after Hunt's statement began.
Gilt prices surged midday Monday. The yield on the 30-year UK government bond narrowed to 4.39% around 1145 BST from 4.85% late Friday.
The yield is still markedly above the 3.78% it stood at the evening before last month's mini-budget, however, suggesting that the jury is still out on the health of the UK's finances - or that some of the damage done to the UK's reputation in the eyes of international investors may prove long-lasting.
On the London Stock Exchange, some of the stocks worst-hit by the mini-budget staged a recovery.
‘The worst-performing UK names since the mini budget have been utilities (owing to windfall tax, nationalization and debt risks), homebuilders and Next. These areas should benefit most from a fiscal U turn,’ analysts at Credit Suisse commented.
United Utilities, Severn Trent and British Gas owner Centrica were up 4.3%, 3.9% and 2.8%. Barratt was among the best of the blue-chip housebuilders, up 3.9%. Retailer Next was down 0.4%, though it had been 1.3% lower earlier on Monday.
Elsewhere, Hargreaves Lansdown dropped 6.5%. The retail investment platform said Chief Executive Officer Chris Hill has decided to retire from the company.
The FTSE 100-listed retail investment platform said it is undertaking a ‘thorough and extensive search for his successor’. Hill will remain in his role until his successor joins and to allow time for a handover up to November 2023.
The company lifted margin guidance on Monday, however.
Hargreaves Lansdown reported net new business of £700 million for the first quarter ended September 30. Assets under administration slipped to £122.7 billion from £123.8 billion at the end of June, amid a £1.8 billion hit from market movements.
Revenue rose 15% to £162.9 million from £142.2 million in the same period last year.
In addition, last Friday, Hargreaves was hit by a lawsuit from RGL Management on behalf of thousands of investors in Neil Woodford's Woodford Equity Income Fund.
Hargreaves Lansdown had promoted Woodford's fund in its influential 'best buy' list until the £3.7 billion fund was suspended in 2019. Around 300,000 investors had their money trapped in Woodford's fund when it was frozen in June 2019 including more than 130,000 Hargreaves Lansdown clients.
RGL Management said ‘it certainly appears that Hargreaves Lansdown knew of liquidity issues in the WEIF from November 2017’.
Asos tumbled 12% as markets fret over possible liquidity worries at the online retailer.
Asos said it is in talks to amend covenants in a credit facility, a move the online retailer believes will offer it better ‘financial flexibility’ amid the current economic uncertainty. Asos said it is in the ‘final stages’ of sealing an amendment to future financial covenants in its revolving credit facility. The RCF matures in July 2024.
Sky News over the weekend had reported that Asos's biggest lenders called on advisers, after the retailer had approached the banks to ask for changes to borrowing arrangements. Sky News also noted that one major credit insurer for Asos's suppliers has reduced its support. This could force Asos to pay for products upfront.
‘Reports that Allianz Trade has more than halved its insurance cover for Asos suppliers would suggest the online retailer is seen as a higher risk entity. Suppliers take out insurance cover as protection between taking an order and being paid for it. When cover is unavailable, suppliers seek upfront payment from customers, which can put pressure on the latter's finances as they need to hand over cash before being paid by their own customers,’ AJ Bell analyst Russ Mould commented.
‘Retailers have been struggling with the cost-of-living crisis where consumers are watching every penny, while at the same time they have had to stomach higher costs. Many shopkeepers, virtual or physical, have seen a rise in inventories as demand has weakened. This clogs up valuable storage space and raises the risk they'll have to slash prices just to shift the stock, thereby depressing profit margins.’
Elsewhere, fellow retailer Made.com jumped 15%. It has received a ‘number of non-binding indicative proposals’ during its formal sale process.
The furniture seller has invited a number of possible bidders to progress towards firm offers by the end of this month, after due diligence. Made added that the suitors are aware of the need of ‘interim financing’ at the time of firm offers being made.
The euro stood at $0.9747 midday Monday, down from $0.9758 at the time of the London equities close on Friday. Against the yen, the dollar was trading at JP¥148.85, up from JP¥148.38.
Brent oil was quoted at $92.09 a barrel midday Monday, up from $91.96 late Friday. Gold was trading at $1,655.63 an ounce, up from $1,648.48.
In New York on Monday, the Dow Jones Industrial Average is called up 1.0%, the S&P 500 up 1.2% and the Nasdaq Composite 1.3% higher.
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