Thankgoodness thats over with

The budget is past us, despite the OBR’s error; most of what was going to be announced had already been leaked to the press, so not much came as a surprise to markets when Rachael Reeves stood up. Possibly the most entertaining part of the event was the leader of the opposition’s response to the budget proposals. Sterling and government securities rose, as did equities, but the latter was probably more on the back of a generally positive day for equities worldwide than a reaction to the budget.

If we quickly take a look at the gilt markets’ reaction and look along the curve, the shorter end, i.e. maturities up to around 5 years, hardly moved. The two-year gilt yields had been falling since the better-than-expected October inflation report, indicating that speculators are becoming more convinced that the Bank of England will cut rates by 25 basis points in December. This budget did nothing to change that expectation.

The longer end of the gilt market rallied modestly, as possibly the market viewed the OBR’s forecasts through rose-tinted glasses. Based on their forecasts the government will not be required to issue as much debt as expected. The OBR expects inflation to return to 2% by 2027, and public sector net borrowing to fall from 4.5% of GDP in 2025-26 to below 2% by 2029-30, driven by reduced spending and increased tax receipts. That is a positive, but it is predicated on receiving those tax receipts and reducing spending, both of which are questionable. We shall see, but it may be in the coming weeks when those tinted glasses come off, and investors become more cautious. 

Wall Street is shut on Thursday and most of Friday for Thanksgiving, and equity markets will remain rudderless until they briefly reopen tomorrow. We had a little shakeout in November, but the holiday rally bailed a few out. Sentiment remains cautious into the last month of the year, and the CNN Fear and Greed Index remains entrenched in fear, which should, in theory, be supportive for risk appetite. Global equities look set to close out the year with yet another double-digit gain.

The focus will then turn to 2026, and the outlook for the global economy and what it means for equity markets, we will write more of that in December.