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London Quick Take – 4 November - Sterling falls sharply as Reeves builds case for tax hikes, FTSE drops 1% as equities slide globally
Note: This is marketing material. This article is not investment advice, capital is at risk.
Key Points
- Sterling falls to lowest since April as UK govt lays ground for tax hikes
- Global equities fall as risk-off dominates
- Amazon shares extend gains on OpenAI deal
- Palantir slips despite beating earnings expectations
Budget watch first: Keir Starmer apparently laid the groundwork for an income tax hike with his MPs yesterday. Chancellor Rachel Reeves delivered a surprise speech today to set out ‘Labour values’ that will guide her Budget on 26 November...ie tax hikes are coming. This could well be a manifesto-breaking hike to income tax - she refused to say she would stick to the manifesto pledge to not raise income tax, NI or VAT. Lots of messaging around values and doing what's right, not what's popular. Reeves is caught between various stools – the country (manifesto pledges), the party (spend more, protect the NHS), and the markets (gilts selling off just narrows the headroom). So, it’s a very tricky line to walk but ultimately, it’s the lack of political leadership from the top that is the making of this situation. However, a bold tax hike should lower gilt yields and could allow the BoE to go further with cuts. This will be a contractionary fiscal blow to the economy. But the bet is that you get the market onside, generate confidence from certainty, which gives you more flexibility later. The risk is that you deal a big blow to confidence in the real economy and hit growth, which makes it all for nought. Either way, fiscal tighter, monetary looser suggests sterling remains on back foot.
- Market reaction thus far is to sell sterling. GBPUSD dipped to retake the 1.30 handle, hitting its weakest since April. It's the pressure valve and Reeves wouldn't like to see that kind of reaction coming directly from her speech. Gilt yields moved lower then back up, with the 10yr gilt yield back to where it started. Big doubt is whether they get the balance right on tax hikes vs consumption here. (And note last year despite the £40bn tax grab it was actually one of the biggest fiscal loosenings in history over the course of the parliament).
- View: Panic stations at Number 11 by the looks of it - offering a speech 3 weeks before the Budget that was only announced last night. The market is doubting credibility - goes back to point about being caught between too competing forces.
Caution reigns supreme with Asian equities setting a risk-off tone overnight as Seoul and Tokyo both fell. European stock markets took the cue and declined at the open, with the FTSE 100 down around 1% despite good progress from BP, which fell despite beating - that kind of day with crude prices lower. European markets sold off more aggressively. Gold pulled back further to sit below $4,000 and bitcoin fell further to below $104k.
BP earnings were surprisingly good considering weaker crude prices. Underlying replacement cost profit came in at $2.21bn for the third quarter, ahead of the $2.03bn expected, albeit still marginally down on the same period in each of the last two years.
US futures turned sharply lower after a mixed session on Wall Street on Monday, with S&P 500 futures closing the gap to last Friday’s close. AI headlines powered the broad market higher yesterday but soft ISM manufacturing data disappointed. It was a classic case of AI versus the rest and even the AI story just reiterated the circular nature of that economy. Then Palantir shares sold off following earnings despite beating estimates. And the government shutdown rolls on – it will soon be the longest in history.
Yesterday, the S&P 500 and Nasdaq rallied as tech and AI resumed control, powered chiefly again by Amazon, while the Dow Jones and small cap Russell 2k fell. Amazon extended its post-earnings surge after announcing OpenAI has signed a deal to buy $38 billion worth of capacity from Amazon Web Services. It marks the first major move away from reliance on Microsoft’s cloud by the $500bn startup. Amazon, which had jumped nearly 10% on Friday, rallied a further 4% to $254.
Palantir topped estimates on its fiscal third quarter and raised its Q4 guidance on AI adoption, but the stock fell. The shares moved a bit further to the upside after-hours but a beat and raise had been well priced with the stock topping $200 before the results and another 3% added in Monday’s session. So, a lack of visibility for 2026 started to weigh in the after-hours session and sellers started to push it lower 4%. Government sales rose 52%, while overall revenues rose by 63%. Its Q4 guide for $1.33bn in sales was easily ahead of the $1.19bn estimated, while it also raised its free cash flow estimate for the year.
IREN jumped 11% as it agreed a $9.7bn deal to outfit a data centre in Texas with Nvidia GPUs for use by Microsoft. Meanwhile, Nvidia continued to rise following news that Microsoft had secured export licences to ship Nvidia chips to the United Arab Emirates.
BP earnings were surprisingly good considering weaker crude prices. Underlying replacement cost profit came in at $2.21bn for the third quarter, ahead of the $2.03bn expected, albeit still marginally down on the same period in each of the last two years.
US futures turned sharply lower after a mixed session on Wall Street on Monday, with S&P 500 futures closing the gap to last Friday’s close. AI headlines powered the broad market higher yesterday but soft ISM manufacturing data disappointed. It was a classic case of AI versus the rest and even the AI story just reiterated the circular nature of that economy. Then Palantir shares sold off following earnings despite beating estimates. And the government shutdown rolls on – it will soon be the longest in history.
Yesterday, the S&P 500 and Nasdaq rallied as tech and AI resumed control, powered chiefly again by Amazon, while the Dow Jones and small cap Russell 2k fell. Amazon extended its post-earnings surge after announcing OpenAI has signed a deal to buy $38 billion worth of capacity from Amazon Web Services. It marks the first major move away from reliance on Microsoft’s cloud by the $500bn startup. Amazon, which had jumped nearly 10% on Friday, rallied a further 4% to $254.
Palantir topped estimates on its fiscal third quarter and raised its Q4 guidance on AI adoption, but the stock fell. The shares moved a bit further to the upside after-hours but a beat and raise had been well priced with the stock topping $200 before the results and another 3% added in Monday’s session. So, a lack of visibility for 2026 started to weigh in the after-hours session and sellers started to push it lower 4%. Government sales rose 52%, while overall revenues rose by 63%. Its Q4 guide for $1.33bn in sales was easily ahead of the $1.19bn estimated, while it also raised its free cash flow estimate for the year.
IREN jumped 11% as it agreed a $9.7bn deal to outfit a data centre in Texas with Nvidia GPUs for use by Microsoft. Meanwhile, Nvidia continued to rise following news that Microsoft had secured export licences to ship Nvidia chips to the United Arab Emirates.
Ford, Kia and Hyundai reported significant declines in EV sales after the end of federal tax credits. Maybe this makes Tesla’s record Q3 look a little tidier? Tesla’s European sales resumed their slide in October, separate data showed. Shareholders are due to approved Elon Musk’s $1tn pay package on Thursday.
Electric vertical take-off and landing aircraft names Joby Aviation and Archer Aviation fell 6-7% on reports that the former’s UAE certification will be completed by the third quarter of next year, well behind the company’s timeline. Archer also recently suffered a setback with its UAE certification...both report this week.
Beyond Meat tumbled after management delayed the planned release of its quarterly results as it tries to clear up how much of a write-down it must take on some assets...shares in the fake meat stock fell 16% as it continued a sharp slide after a monster meme-stock-fuelled rally.
Volatility is bubbling under the surface as evidenced by options trading...Here’s Mandy Xu from Cboe: “The number of stocks in the S&P top 100 trading with inverted call skew (a sign of extremely bullish sentiment where the OTM call trades at a higher volatility than the ATM call) has surged to a high of ~20% (vs. historical average of just 3%). While the metric is not yet at the extremes we saw in 2021 or late last year, it certainly signals a high level of investor optimism going into year-end.”