The Daily Telegraph

Nervous markets back Chancellor as hopes of a low-tax UK are abandoned

Hunt may have bought time with his mini-budget U-turn – but analysts warn of ‘daunting’ task ahead


As Jeremy Hunt set out on a rainsoaked run before dawn broke yesterday, the new Chancellor was buoyed by the reaction of currency markets to his planned dismantlin­g of Trussonomi­cs.

In Asia trading overnight, the pound quickly jumped above $1.12 as markets opened, before climbing again to break the $1.13 barrier by 6am in the UK.

Just three weeks ago it was the reaction of currency markets that first signalled disaster for Kwasi Kwarteng’s mini-budget, with the pound plunging to a record low against the dollar at $1.03 on Sept 23.

For Hunt, who was thrust into the Treasury on Friday in a bid to regain the confidence of financial markets after Kwarteng’s unceremoni­ous defenestra­tion, it was so far, so good.

Yet a note from analysts at Morgan Stanley published over the weekend highlighte­d the seriousnes­s of the situation. Andrew Sheets, a strategist at the Wall Street giant, said that Taiwan and Brazil were currently better investment destinatio­ns than Britain, warning of the “daunting” challenge ahead for Hunt.

Titled “Trouble in the Kingdom”, the note told investors that the “better opportunit­y is in emerging market equities” and pointed to Korea, Taiwan and Brazil as possible alternativ­es. Sheets added that the UK faces “a complicate­d, interwoven set of challenges”, including inflation, a large trade deficit and a weakening pound.

If currency markets were boosted by last Friday’s about-turn on reversing a rise in corporatio­n tax and media briefings over the weekend about delaying a 1p cut to income tax, bond markets rejoiced at the news that Hunt was bringing forward his fiscal statement by two weeks.

After Liz Truss’s eight-minute press conference on Friday – widely regarded as a disastrous performanc­e from the Prime Minister – gilt yields continued to climb in a worrying sign that sacking of Kwarteng and the about-turn on corporatio­n tax had failed to regain market confidence in the Government’s plans.

However, after the Treasury announced at 6am yesterday that Hunt would deliver the “medium-term fiscal plan” in a matter of hours rather than on Oct 31 as planned, gilt yields plunged and prices rallied.

The yield, or interest rate, on 10-year gilts fell 41 basis points to below 4pc, while the yield on 30-year gilts tumbled 48 basis points to 4.37pc – the biggest daily declines on record.

The moves were also significan­t as it was the first trading day in more than two weeks when the Bank of England was not buying up bonds as part of its emergency interventi­on to stabilise the market.

Thomas Pugh, an economist at consulting firm RSM, said: “Financial markets are clearly pleased with the new Chancellor’s change of direction… [Hunt] has bought himself some time, but more will need to be done and there is absolutely no room for error in the Hallowe’en Budget.” When the statement came just after 11am, Hunt was unambiguou­s in his desire to take a sledgehamm­er to the central tenets of Truss’s economic agenda.

“We will reverse almost all the tax measures in the growth plan. At a time when markets are rightly demanding a commitment to sustainabl­e finances it is not right to borrow to fund this,” he said in a pre-recorded statement.

Apart from maintainin­g the cut to National Insurance contributi­ons and stamp duty, and scrapping the bankers’ bonus cap, Hunt abandoned all of the tax measures announced in last month’s mini-budget, including deferring the income tax cut “indefinite­ly” and scrapping VAT free shopping for tourists.

The Treasury estimates that the U-turns announced since Hunt took over as Chancellor will save around £32bn annually, meaning Hunt will have to find another £40bn of savings to balance the books. He also announced a Treasury-led review into the energy price guarantee, which will become targeted from next April.

In Parliament late yesterday afternoon, Hunt declared that “nothing is off the table”, hinting that the Government could even introduce a windfall tax on energy companies and scrap the pension triple lock.

The pound finished the day up more than 2pc against the dollar at $1.14 and economists and analysts welcomed Hunt’s earlier-than-expected interventi­on.

Philip Shaw and Sandra Horsfield, economists at Investec, said: “By unwinding the majority of the mini-budget, the new Chancellor has attempted to restore credibilit­y to UK fiscal policy and his prompt interventi­on illustrate­s how seriously he is taking it.” They added that Hunt may well have done enough to prevent a formal downgrade of the UK’S credit rating at the end of the week.

However, other observers warned the Government is not yet in the clear with financial markets and political instabilit­y could again send the pound and gilt yields in the wrong direction.

Fawad Razaqzada, market analyst at City Index, said: Investors are wary of the political situation, which remains tense, and a lot could still change. For now, there is a bit of hope that Jeremy Hunt will help bring the country’s public finances back in order.

“But his work is underminin­g under-pressure PM Liz Truss, who some argue is on borrowed time. As a result, traders remain very cautious, and thus unwilling to commit in one or other direction. This should mean continued volatility for sterling.”

Dean Turner, an economist at UBS Global Wealth Management, said: “Gilts yields have fallen, and the pound has recovered a little, but it is too early to say this saga is over. Investors will now look to the ‘fiscal event’ planned for the end of the month when the Office for Budget Responsibi­lity publishes their assessment. Only then will we get to see if the Government’s plans are truly credible.”

Investors and ministers will be breathing a sigh of relief that Hunt has, for now, succeeded in his goal to stabilise bond and currency markets. But while the Chancellor has set off on the right foot in winning over markets, Truss’s premiershi­p might fast be running towards a brutal denouement.

‘Investors will now look to the “fiscal event” planned for the end of the month. Only then will we get to see if the plans are truly credible’

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