What to Expect From the UK Autumn Budget?

Markets are looking forward to the release of the UK's Autumn Budget with trepidation, but that could mean a substantial relief rally if the Chancellor manages to thread the needle.

The Key UK Budget Issues

• Traders are concerned that the Budget could include tax increases that will slow the economy and weigh on the pound and stock market.
• The market is concerned that if taxes aren't raised enough, the government will have to borrow more, triggering another crisis.
• The hope is that the Chancellor strikes a balance that satisfies markets, but even that still leaves the potential for political fallout.

Markets concerned about the Autumn Budget

UK Chancellor Rachel Reeves has a difficult task when presenting the Autumn Budget to Parliament on Wednesday. on social programmes, which the Party believes will help boost growth. But pandemic-era spending has pushed Britain's debt to historic levels, making financial markets nervous and reluctant to lend to the government. With Prime Minister Keir Starmer's low popularity among his own party, he could face a revolt within Labour if his Budget privileges market concerns over political demands. On the other hand, if the Budget fails to convince the City, it could precipitate a Liz Truss-style "mini-budget" crisis.

Markets have a double concern around the Budget. The first is that the government faces next year. Analysts blame the current situation of high inflation and anaemic growth on last year's budget, which also had higher levies. At the time, Reeves promised not to raise taxes, and substantial changes could challenge her credibility as well. However, if taxes aren't increased enough, the government would be forced to borrow more money. This would likely raise gilt yields, and financial institutions could face substantial losses, potentially triggering an economic crisis. Either option would likely weigh on UK equities and the pound, as investors shy away from Britain.

Rumours of Small Tax Increase Hint at Relief Rally

Ahead of the budget release, rumours and alleged leaks have given markets some idea of what to expect. Those include a report a couple of weeks ago that . The hope is that the Budget increases taxes enough to cover the budget shortfall but not so much that they substantially slow the economy. If traders are convinced that Reeves has pulled that off, then clearing up the uncertainty about fiscal policy could provide a substantial relief rally. Generally, this could be good for UK stocks and the pound, as the market reprices a slower BOE easing cycle.

Specific sectors could have disparate results depending on the details of the spending bill. For example, one measure under consideration is an increase in bank taxes, which could affect major financial institutions separately from the general reaction to the budget. Other measures under consideration include increasing the dividend tax. That could support the pound, as it means the government will be less likely to borrow, but it will weigh on UK stocks, as it makes them less attractive as an investment. Overall, however, the initial market reaction will likely depend on whether markets believe the Budget does enough to shore up the public's finances. Then, eyes turn to the political fallout.

FTSE 100 in Holding Pattern Ahead of Budget

The UK’s premier index failed to extend to 10k back in November, forming peak resistance at 9930 and declining to 9420 since. However, VWAP has been flattening out in a holding pattern after the index bounced at the low last week, bringing into focus the middle VWAP at 9700 on the one hand and the major ascending trendline of the autotrend on the other, near 9500. As RSI shows further room in either direction, further upside continuation would open the door to 9950 in the following days, whereas a disappointing Budget would expose 9300 and 9100.

Source: SpreadEx | UK 100