The UK’s Autumn Statement arrives laden with investors waiting to see whether the British government will make good on recent heavy-handed hints about fiscal expansion.
Past Treasury updates have tended to be a damp squib in global financial markets — political posturing and fiddling with tobacco taxes rarely able to catch the interest of international money.
This year however the chancellor, Philip Hammond, has an opportunity to outline the UK’s priorities on tax and spending for the first time since the vote for Brexit — and investors are all ears.
Will there be more government spending? Greater direction on the country’s transition out of the EU? Deals for companies that threaten to remove their operations?
These are the key points that financial markets will be looking out for on Wednesday as the Chancellor steps up to the despatch box to present his first Autumn Statement.
1. August 4 — Bank of England cuts rates and starts quantitative easing
2. October 7 — Sterling suffers flash crash
3. October 14 — Gilt yields rise on fears of “Hard Brexit”
4. October 23 — Third-quarter GDP figures show better than expected growth
5. November 9 — Donald Trump wins US election
Is the UK about to borrow more?
The economy may have sailed through the immediate aftermath of the vote for Brexit in better shape than expected, but a gloomy period of lower growth and weaker tax revenues remains on the cards.
Add the government’s failure to sell off Lloyds and RBS shares and the official forecast is showing a £100bn hole in UK finances by 2020.
To shore that up, the UK is expected to increase its borrowing — with RBC anticipating net government borrowing will be revised up by £8bn for 2016-17 to £63.5bn and Bank of America Merrill Lynch expecting an extra £18bn.
If that sum is added to gilt issuance it would represent a significant increase, and one that credit analysts say would likely raise the country’s cost of borrowing — currently at 1.45 per cent and up from a post-Brexit vote low of 0.51 per cent, for 10 years.
“If the chancellor announces a surprisingly big increase in future borrowing at the Autumn Statement, that will send yields higher,” says John Wraith, head of rates at UBS. “Even though the new supply dynamic that implies won’t happen immediately.”
Gilt yields have risen sharply in recent weeks as investors bet on the return of inflation and slowdown in central bank stimulus — curbing appetite for assets that pay out fixed sums.
However, overseas demand for British government bonds proved robust in September, offering hope that international markets will be able to soak up any extra gilt supply.
There is also the chance that the increase in borrowing will skip gilts altogether and be funded elsewhere. Possible alternative sources include an increase in ultra short-term Treasury bills or National Savings & Investment inflows, which could leave gilt yields around current levels.
What impact will the statement have on the pound?
Post-Brexit vote, sterling has risen more than usual on strong data — mainly because forecasts about the economic impact of a No vote were so dire.
But that was before the Article 50 High Court ruling made investors factor in the legal quandary of triggering Brexit. And it was before Donald Trump’s victory in the US election. Both of these, according to Kamal Sharma, FX strategist at Bank of America Merrill Lynch, are perceived by some investors to have given the UK “a stronger bargaining edge against Europe”.
The upshot is that sterling, while still volatile, has been edging higher against the dollar and strengthening against the euro — at $1.2460 and €1.17 respectively. Against that backdrop, the Autumn Statement is unlikely to shift investors’ sentiment towards the pound.
“It looks like sterling is going to trade sideways, until we get more into the politics of Brexit,” says Mr Sharma.
Will there be a new infrastructure bond?
Infrastructure is the buzzword that has investors most excited right now — witness the market moves generated by Mr Trump’s talk of boosting spending on roads, bridges, airports and hospitals in the US.
In the UK, public sector investment on rail and road improvements are seen as the most likely form of stimulus, according to RBC’s Sam Hill, senior UK economist.
But while Theresa May’s government is reported to be considering Treasury-backed bonds to finance more projects, no one is sure how they might work.
One gilt investor calls the idea a “ludicrous marketing exercise”, pointing out that the rate of borrowing would probably be higher than straightforward government debt, while the pool of potential investors will be smaller.
Will there be sweetheart deals for companies post-Brexit?
Last month the UK business secretary, Greg Clark, said the government was trying to protect Britain’s car manufacturing industry from the impact of Brexit — leading other industries to call for similar help.
Assurances given to Nissan persuaded the Japanese carmaker to stay, and committing to build two key models in the UK.
Last week, as US stocks just saw the biggest weekly inflow since late 2014, the UK market did not receive the same treatment. Uncertainty about the impact of Brexit and the pound’s slight strengthening has undone some of the help that a weaker currency provided to companies in the FTSE 100 and 250 that derive their earnings overseas.
The FTSE 100 is down 2.6 per cent in the last month while the FTSE 250 is down 1.6 per cent — although both remain close to record highs.
“Nissan is just one of many companies — it illustrates the uncertainty that is building in the UK and why investors here may be more cautious than they are in the US,” says Armin Peter at UBS.
