In the not too distant past, a week was seen as a long time in politics but this autumn it seems that adage can be applied to just a day. Within 24 hours the Chancellor of the Exchequer Kwasi Kwarteng was sacked and replaced by Jeremy Hunt.
Kwarteng was only in office for 38 days but since he announced his mini budget over two weeks ago, markets have been in a tail spin and he was forced to reverse his position on a tax cut for the higher earners.
Equity, bond and currency markets saw dramatic sell offs and it is not clear that the eight minute and 21 second press conference held by Prime Minister Liz Truss today will restore economic and political stability in Britain.
It certainly was a roller coaster ride for the FTSE 100 as investors digested the news. It collapsed as Kwarteng’s sacking was confirmed, rising on Hunt’s appointment, steadying on the news of the corporation tax U-turn and then falling again after Truss’s short press conference.
The government cancelled the rise in corporation tax from 19% to 25% from next April
Meanwhile, the pound dropped 0.4% against the dollar at $1.1285 while gilt yields, which indicate the future cost of government borrowing, had been falling all day and for most of the week.
The 30-year gilt yield fell 0.25 percentage points before Kwarteng was fired but had climbed back to 4.51%, after Truss appointed Hunt who is a former health as well as foreign secretary.
As Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown notes, “This move hasn’t succeeded in reassuring the investors significantly. They are still reeling from Kwasi Kwarteng going abruptly from arrivals to a humiliating departure, in a fresh bout of UK political turmoil.
The pound has stayed pretty volatile, falling back on the news of the Chancellor’s sacking, and has been hovering around the $1.12 mark, given that the expectation of policy reversal had already been priced in.”
She adds, “Over the medium term the tax reversal may silence the bond vigilantes a little and stem a further exodus from gilts, but the government’s economic credibility has badly suffered over the past few weeks and it’ll take a lot more to repair the damage.”
David Page, head of macro research at AXA Investment Managers, also notes that today is the last scheduled day of Bank of England temporary long-gilt purchases which have been propping up the market since 28 September. The final tally was £19.3 billion
“The question remains what will happen next week,? ” he asks. “On the positive side, the U-turns in policy now reduce the total additional tax-giveaways of the mini-budget by about half, the Prime Minster has suggested there will be slower spending increases and the appointment of Chancellor Hunt adds some credibility to the cabinet.
However, the mini-budget has still added some £75 billion of tax-giveaways over five years, the Prime Minister remains committed to a high growth, low tax economy and a full Budget is still over two weeks away.”
