Following the turmoil of September, the shocks have continued into October. We have yet another new Prime Minister, and had barely had time to adjust to September’s mini budget before most of the proposals were scrapped.
The pound remains weak and global markets are still volatile on the back of rising inflation and interest rates, as well as the ongoing energy crisis.
A New Prime Minister – Again
After less than two months in her new appointment, Liz Truss resigned as Prime Minister and was shortly replaced by Rishi Sunak.
By this point, Jeremy Hunt had already replaced Kwasi Kwarteng as Chancellor, and announced a u-turn on most of the measures introduced in the mini-budget.
This included the reduction in basic rate tax, corporation tax, and dividend tax. The reduction in National Insurance and stamp duty were to remain in place.
Generally, markets are not significantly affected by elections, leadership contests, or the current incumbent in Number 10. But the frequent changes point to a lack of stability and suggest that the UK is not a safe bet for overseas investors. The pound weakened further on the back of Mr Sunak’s appointment, wiping out some of the previous days’ recovery.
However, early economic predictions are cautiously optimistic, bearing in mind the significant challenges facing the new Prime Minister.
The Autumn Statement, which would normally take place in October, has been delayed to November, and is expected to lay out plans to reduce the fiscal gap. Having already backtracked on the possibility of borrowing to fund tax cuts, it is likely that we will see real-terms reductions in government spending.
The Energy Crisis
After the promise of a £2,500 energy price cap for the next two years, it was quickly announced that this, along with most of the other measures announced in the mini budget, would be revoked. The price cap now only applies until April 2023. Thereafter, any support is likely to be means tested.
However, there are promising signs that the current crisis may not last forever. Wholesale prices peaked in August, but have since dropped by around 65%. European gas supplies are well-stocked for the winter, partly due to favourable weather which has reduced demand.
Of course, the longer term picture is less certain. Gas is still a limited resource and the Ukraine war is no closer to a resolution. But getting through the winter months is likely to be less painful than initially thought.
The UK Market
Despite the volatility of the recent months, the UK market has remained fairly stable in October. The FTSE 100 has returned around 0.8% and the All Companies sector has increased by 2.1%.
Top performers include Trustpilot, Funding Circle, and Halfords, which have all had a troubled 12 months. Oil and gas company Pharos Energy has also performed well, continuing its positive 2-year run.
The worst performers this month include Secure Trust Bank, Aston Martin Lagonda, and Rank Group, an online gaming, casino, and bingo company.
Overall, the UK economy has contracted at its fastest rate in two years in October. This indicates that the long-awaited recession has arrived. While recession is a normal part of the economic cycle, it has been exacerbated by high costs and political uncertainty.
Bonds have been extremely volatile in the last 12 months following concerns over inflation and rising interest rates. Gilts in particular were impacted, despite being regarded as one of the safest investment choices. Concerns over the stability of the UK economy and debt levels have added to the volatility. The Bank of England stepped in to buy gilts, which helped to stabilise prices.
Prices have picked up further following the appointment of the new Prime Minister and the decision to backtrack on tax-cutting measures. It appears that losses resulting from September’s catastrophic mini budget have now been recouped, although prices still have some way to go to recover to their peak.
The Global Outlook
Currency fluctuations have continued to cause issues throughout the world. The dollar is at its strongest point in 20 years, but this is not necessarily good news for the US economy.
The large companies which dominate the US market trade globally. This means that when the value of sales made abroad is converted back into dollars, the true value (and therefore company turnover) is lower. It also means that overseas consumers may find better prices elsewhere. This does not bode well for the third quarter earnings announcements.
Credit Suisse estimates that for each 8-10 percentage points by which the dollar index rises, around 1% of the value of the S&P 500 will be wiped out. The dollar has already risen by 17% this year so far. The North American sector overall has dipped by 3.3% over the last month.
For the dollar to weaken, it is likely that this will require a reduction in interest rates. The Fed has committed to raising interest rates to tackle inflation, so it is unclear how long this will take.
Asian markets have seen the biggest fall this month, with the Asia Pacific sector losing over 10%. Economic optimism in China is still at a low level as companies have cut back on investment, mainly due to extreme Covid measures. Problems in the property market, tensions with the US, and a strong dollar have also impacted the Chinese economy.
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The content in this article was correct on 31/10/2022.
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