An update on UK political U- turns

What a day, the UK has a new Chancellor and at the time of writing the PM is facing a barrage of hostile questions about why Liz Truss gets to stay in office, yet the Chancellor was forced to step aside. There has been a second U-turn away from the mini budget that was announced on 23rd September. The hike in corporation tax will now take place next April, and corporate tax will rise to 25%, this comes after the reversal of the scrapping of the 45% rate of tax earlier in October. Freezing the corporate tax rate was the jewel in the crown of the mini-budget last month, thus, today’s U-Turn dismantles the libertarian economic agenda that truss had attempted to push through in the first weeks of her premiership.

If Truss thought that today’s press conference was going to be enough to stabilise the market for UK assets, she needs to think again. After initially falling sharply, UK gilt yields are rising once more. The 30-year UK Gilt yield is now up 3 basis points, having risen by 0.23% since the PM’s press conference and it is back above 4.5%. Likewise, the 10-year yield is now back above 4%, having eroded its advantage from earlier this morning. This means that the spread with benchmark US yields has widened post the PM’s speech, which tells you everything that you need to know about how the markets feel about the Truss government and its ability to manage the economy. Below, we consider why this has happened, and what the endgame could be.

·      The pound is falling sharply on the back of the PM’s press conference, which suggests that today’s events have not done anything to boost the credibility of her government. In fact, a change of Chancellor a mere 37 days after his appointment, suggests more economic policy uncertainty is to come. Thus, the announcement of Jeremy Hunt as Chancellor is probably not enough to stabilise UK asset prices.

·      UK bond yields are also higher, which suggests that the market is still out for blood, probably the blood of Liz Truss. Her commitment to growth in her presser shows that the ideology behind her original budget has not changed, and you can’t run the country on ideology alone, especially when the markets are this febrile.

·      The U-turn on corporation tax is a welcome move when you have a large current account deficit and large spending plans with the energy price guarantee. However, it stops short of bringing in more revenue through a windfall tax on energy companies who have benefitted by the energy price volatility. However, the fact that BP and Shell’s share price have been muted on the back of this omission, which suggests that some expect a windfall tax to be announced as the government takes its time dismantling Kwasi Kwarteng’s economic policy agenda.

·      The PM also said that £18bn would be raised from the corporation tax U-turn, while we don’t think that the increase in the corporation tax rate will cause companies to leave the UK, it may not be the cash cow that the PM said it would be.

·      UK blue chip stocks are higher today, no doubt buoyed by the wave of euphoria in US markets on Thursday and somewhat protected from the chaos in the UK due to their deep inroads into global markets.

Overall, economic policy uncertainty remains high in the UK, and until that is fixed, there will be no long-term recovery for UK asset prices. The endgame still remains a change of government in the UK, now that the Tory party has lost its credibility with financial markets.