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Bookies and banks main winners from the do-nothing Budget as gilts shrug
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Steady-as-she-goes: A Budget that largely set out what was required and expected of it – not to rock the boat. It seems clear that a do-nothing Budget means we are on course for an early election in 2027. Fiscal headroom was at the low end of the tolerance for markets at £15bn but gilts shrugged. Healey will be happy so far.
Sterling was offered before the Budget with cable taking out a two-week low at 1.3270, while the pound was also down against the euro. Four sharp days of losses looked a bit overdone, but traders didn't want to front-run potential Budget risk. But there was little drama and some elements of fiction – just dull enough to keep the market on side. GBPUSD ticked up a touch off the lows of the day to $1.33 but isn't doing an awful lot.
Gilt yields were fairly stable and didn't move too much before, during or after the announcement with the 10yr down a couple of basis points from 5.35% to 5.32%. The moves need to be seen in context of global bond markets being under a touch of pressure with rising Middle East tensions and US threats to strike Iran after the mid-terms with a 'short, intense' war pushing crude prices up more than 1%. So gilt yields down, Treasury yields up a notch suggests that market is happy with this Budget. One aspect was how inflationary this Budget could be. Policy measures reduce CPI inflation by 0.1 percentage points in 2027 and increase it by around the same amount in 2028. Another was the credibility and it seems a little fiction and no drama was the right mix for bond vigilantes. I get the impression that markets believe the OBR is too pessimistic on growth forecasts (more on that below). And a third was issuance and the DMO has helped by reducing sales of long conventional gilts, easing pressure at the long end even though overall issuance is higher. The DMO also said issuance is forecast to rise to £312.6bn in 27/28 versus the £307.6bn it predicted in March and April, but this was below expectations in the market for a rise of about £26bn, so again the issuance factor is helping the picture for gilts.
In terms of equities, banks and bookies won because the tax hikes were not as bad as feared. Bookmakers breathed a sigh of relief after the Chancellor raised the machine gaming duty from 20% to 25%, which was less than had been feared by the industry. The resulting bid for Entain took it to the top of the FTSE 100 with a +5% rally, while Rank rallied +10% to top the FTSE 250.
There was also relief for banks. Bank surcharge from 3% to 6% was better than expected by the banks. Most exposed to the bank surcharge - Lloyds, NatWest, Shawbrook and Barclays, rose +2-4%, while Standard Chartered was up +4% chiefly on earnings. HSBC remained a laggard following its drawdown on the earnings miss yesterday.
Defence got some positive noises with the chancellor plugging the £4.7bn funding gap in the existing DIP, and talking up the 3% NATO target, albeit kicking the can down the road to next year's spending review. There was also some extra investment and lending earmarked for defence outside the primary budget. Rolls-Royce traded +1% higher and BAE Systems erased earlier loss es as the Budget wore on. Bit of a glass half-full/empty situation on defence shares depending on how you look at it. Babcock, Chemring and Cohort were all +2% while Qinetiq rose nearly 1%.
Good news for housebuilders initially sent them broadly higher with Persimmon, Barratt Redrow, Crest Nicholson, Berkely Group shares rising 1-2%. Plus, there was an extra £1.5bn for social and affordable homes sent Vistry even higher on the session, kicking on +4% before the market remembered that the latest strategic overhaul launched by new CEO Adam Daniels will see the company shrink its completions by a third with the majority in the future to be sold on the open market, unwinding the move by the previous boss Greg Fitzgerald to build mainly for housing associations and institutional landlords. But otherwise some broad measures to support housebuilding are a net win. But, shares of housebuilders turned sharply lower later on as there emerged a sense that the Your First Home scheme would not start lending until April 2027, and the funding behind indicated a duration that was less than expected, perhaps only two years.
At the index level there is clearly some relief shown with the FTSE 250 up 0.4% and making progress after a quiet morning. The FTSE 100 rallied about 0.25%, led by banks, erasing earlier losses.
First thoughts on some of the key highlights...
Borrowing down across the forecast period. Borrowing falls to 4.2% of GDP this year from 4.4%, 3.4% next year, 2.9% in 2029, 2.1% in 29/30 and 1.8% in 2030/31 and 31/32. These borrowing figs are significantly higher than was projected by the OBR in March, largely due to the impact of the US-Iran war.
Fiscal expansion today, backloaded consolidation. The direct effect of government measures in the Budget is to increase borrowing by £7.6 billion in 2026-27, £3.5 billion in 2027-28, and £0.4 billion in 2028-29, thereafter it reduces borrowing by £4.1 billion in 2029-30, £5 billion in 2030-31 and £12 billion in 2031-32. This is the classic trick to defer difficult real terms cuts or tax hikes today.
Debt/GDP goes up next year from 83.2% to 83.8% before declining to 81.7% by the end of the forecast horizon. It looks like it's a bit of the usual fiscal consolidation in the post, with real terms spending cuts backloaded. How credible is this?
OBR growth figures don't look too optimistic with growth +1.2% this year up from 1.1% in the spring and declining to +1.0% next year, a significant downgrade from the +1.6% forecast in March before ticking up to 1.6% in 2028. The figures for the rest of the forecast period of 1.8%, 1.7% and 1.6% are meaningless figure in the air numbers. Again, the OBR seems too pessimistic. And it seems to be too pessimistic on wage growth, forecasting no real terms wage growth over the next two years.
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