Markets are likely to remain spooked this week as analysts express fears of a looming recession and the health of pension funds lingers alongside the continuing fallout from the UK Government’s mini-Budget and subsequent U-turns.
The Bank of England has ruled out any further intervention to help pension funds although the appointment of Jeremy Hunt as Chancellor of the Exchequer may yet calm nerves frazzled by the end of its emergency bond-buying scheme.
There may also be an element of “wait and see” as UK inflation figures are due out on Tuesday and, having fallen to 9.1 per cent in August from just over 10 per cent in July, the hope is a further dip may act as a short- term balm and prevent any serious volatility.
But there are long-term fears over the UK economy and Goldman Sachs’s analysts have downgraded Britain’s economic outlook.
A report cited Goldman Sachs was expecting worse to come: “Folding in weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax from next April, we downgrade our UK growth outlook further and now expect a more significant recession,”
Goldman has revised its 2023 UK economic output forecast to a one per cent contraction from an earlier forecast of an 0.4 per cent drop in output, with core inflation seen at 3.1 per cent at the end of 2023, down from its previous level of 3.3 per cent.
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Experts predict the week ahead will be an interesting one, although the appointment of Hunt may help to calm some of the “noisier” trade.
Richard Carter, head of fixed interest research at Quilter Cheviot, said gilt yields and the pound would be the main focus as the trading week got under way.
He added: “Sterling continues to be a prominent victim in this fiasco, with its value against the dollar once again seesawing on the political turmoil that is playing out.
“This volatility will be going nowhere until we get some sort of stability at the political level and once fiscal and monetary policy are singing from the same hymn sheet. While such volatility can present good opportunities for investors, it is key they are selective in this, given how much sway politics is currently having on the UK market.”
“The expected U-turn on the mini-Budget policies will be welcomed by investors and the market as a first step to getting the UK’s public finances back on a sustainable path. It is hoped too that this move takes the pressure off the Bank of England to raise rates too aggressively and thereby reverse some of the extreme moves we have seen in the gilt and mortgage markets.
“That is not to say interest rates won’t still rise – they need to in order to help tame the inflation beast – however, the BoE should be reassured enough at this stage that it doesn’t need to go harder or extend its support to pension funds that have been caught out by the rapid rise in yields.”
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Adrian Anderson, director of property finance specialists, Anderson Harris, said: “The last three weeks have been an extremely anxious time for those who have a mortgage or are seeking to take out a mortgage. Kwasi Kwarteng’s mini budget contained £45bn of tax cuts, which sparked chaos and sent shockwaves through the markets.
The average two-year fixed rate was circa 4.74 per cent on the day of Kwarteng’s mini-Budget, this rate is now about 6.11 per cent. Existing mortgage borrowers just don’t know how they are going to be able to afford these new mortgages rates. Those seeking to get on to the property ladder are put off by the idea of forking out for a fixed-rate mortgage at circa 6 per cent.
Jamie Morrison, head of tax at accountancy firm HW Fisher, said: “Another U-turn decision made by the Prime Minister this afternoon, but the extent of the latest fallout remains to be seen. It is not yet clear how the increased rate of corporation tax will impact UK growth and attracting investment. Many businesses are already struggling with crippling inflation, energy costs and debt, and they need a government that is fully behind them. A difficult task for the new Chancellor to solve.”
Danni Hewson, financial analyst at AJ Bell, said there were a lot of issues for markets to navigate, with or without politics.
She said: “Even without the game of political musical chairs under way at Downing Street, markets had a great deal to consider as they start the new working week. Has the Bank of England’s bond-buying programme done enough to shore up pension funds and prevent yields spiking further? What will Wednesday’s inflation number look like and how will that impact the anticipated interest rate trajectory? And will there be any more nasty surprises as names like Netflix, Nestle and Asos deliver their earnings updates? Warning lights are flashing everywhere and nowhere more so than at the heart of government. “
“Jeremy Hunt’s clearly relishing his new role as chancellor, a with a steady, serious, statesmanlike appearance on just about every media outlet over the weekend. He’s wooed Bank of England Governor Andrew Bailey with a meeting of minds and neatly taken apart almost every brick of the Trussonomic tower even before he’s got his feet properly under the table.
“Markets would be more likely to look favourably on his promise of fiscal prudence if only it didn’t come with such a huge side serving of unpredictability. Who is really in control of the Government and for how long? It’s often said markets don’t like instability, right now it feels we’re at the epicentre of a political earthquake of mega-magnitudes and most investors are just hoping they’ll find a soft place to land when all the shaking stops.”
