London close: Stocks weaker, sterling slides on Kwarteng's plans
London stocks were well below the waterline by the close on Friday, as sterling tumbled through the session after Chancellor Kwasi Kwarteng announced some of the biggest tax cuts since Margaret Thatcher’s premiership.
The FTSE 100 ended the session down 1.97% at 7,018.60, and the FTSE 250 was off 1.96% at 17,972.69.
Sterling was in practical freefall at points of the afternoon, and was last down 3.12% against the dollar at $1.0910, while it weakened 1.87% on the euro to change hands at €1.1226.
“We have to go back to March 2020 and the wild swings of the pandemic to find a time when the pound last suffered such a terrible week against the US dollar,” said IG chief market analyst Chris Beauchamp.
“Those hoping for a vote of confidence from the market in the government’s ambitious tax-cutting programme have been sorely disappointed; instead of giving people reason to be confident about the UK economy, they seem merely to have provided another reason to flock to the safety of the dollar.”
Hogging the headlines was newly-appointed chancellor Kwasi Kwarteng, who unveiled his plans to boost economic growth in a ‘mini-Budget’ earlier, axing the cap on bankers’ bonuses, abolishing the highest rate of income tax and permanently increasing the stamp duty threshold.
Addressing the House of Commons, Kwarteng told fellow politicians that the government was targeting annual growth of 2.5% in the medium term.
"Growth is not as high as it should be," he said.
"We need a new approach for a new era, focused on growth."
As expected, Kwarteng confirmed that the 1.25 percentage point rise in National Insurance - introduced earlier this year by predecessor Rishi Sunak to help fund social care - would be unwound from 6 November.
He said additional funding for the NHS would be maintained at the same level, though did not immediately specify how.
“Bond vigilantes were only ever biding their time - the reaction in the bond market to the misnamed mini-Budget is striking with yields surging after the Chancellor unveiled sweeping tax cuts that abandon any semblance of fiscal discipline,” said Neil Wilson, chief market analyst at Markets.com.
“It means more borrowing and more borrowing costs - this is not the reaction any chancellor wants from a budget but what else could he expect?”
Wilson quipped that it was “not just vigilantism”, adding that traders were now betting that the fiscal easing would drive the Bank of England to take a “much more forceful” approach to tightening.
“Markets now indicate a 50% chance the BoE goes for a jumbo 100-basis point hike in November.”
In economic news, fresh survey data showed UK business activity falling at the fastest rate since January 2021 in September, as cost pressures and waning demand took their toll.
The flash S&P Global/CIPS composite purchasing managers’ index - which measures activity in the services and manufacturing sectors - declined to 48.4 from 49.6 in August, coming in below consensus expectations of 49.0.
A level above 50 indicates expansion, while a reading below signals contraction.
The services PMI fell to 49.2 in September from 50.9 a month earlier, while the PMI for the manufacturing sector printed at 48.5, up from 47.3.
“UK economic woes deepened in September as falling business activity indicates that the economy is likely in recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
“Companies report that the rising cost of living, linked to the energy crisis, and growing concerns about the outlook are subduing demand and hitting output levels to an extent not seen since 2009, barring the pandemic lockdowns and initial 2016 Brexit referendum shock.”
Elsewhere, retail sales fell sharply in September, reversing a brief return to growth seen over the summer.
According to the latest CBI distributive trades survey, the retail sales volumes balance came in at -20%, a sharp contrast to August’s growth of 37%.
The reading was the lowest since April and well below analyst forecasts for around 10%, while sales were also forecast to continue falling next month, although at a slower rate of -13%.
“Following a brief return to growth last month, retail sales volumes have once again fallen in the year to September, as the cost of living crisis continues to weigh on households’ spending,” said Martin Sartorius, principal economist at the Confederation of British Industry.
“Retailers remain pessimistic about the outlook.”
On the continent, S&P Global's eurozone manufacturing PMI fell to 48.5 in September from 49.6 a month earlier, according to preliminary estimates.
September's preliminary reading pointed not only to a third straight monthly contraction in factory activity but also to the biggest drop since June 2020.
Production fell for a fourth straight month, weighed down by surging energy prices, while inflows of new orders fell for a third month in a row amid higher costs of living.
Finally, across the pond, US business activity shrank again in September, albeit at a slower pace.
S&P Global’s headline flash purchasing composite output index rose to 49.3 from 44.6 in August.
The flash PMI for the manufacturing sector ticked up to 51.8 in September from 51.5 a month earlier, while the services business activity index came in at 49.2, versus 43.7 in August.
On London’s equity markets, housebuilders initially rallied on news of the stamp duty changes but quickly fell back again, having gained earlier in the week following reports of such a move by the Chancellor.
Berkeley Group was down 5.21%, Persimmon lost 1.85%, Redrow was off 1.06%, and Taylor Wimpey was 2.04% weaker by the end of trading.
Real estate investment trusts - which can act as a bond proxy - also fell as government bonds took a hammering after Kwarteng’s tax cuts.
Segro lost 4.5%, Land Securities Group slid 5.93%, and British Land was 4.44% weaker.
Luxury fashion brand Burberry Group lost 4.6% after announcing that Julie Brown planned to step down as chief operating and financial officer in April, after six years.
Wealth manager Investec Group ticked 1.42% lower despite saying that it expected to post a jump in first-half adjusted operating pre-tax profit to between £372.6m and £406.2m, from £325.7m a year earlier.
On the upside, engineer Smiths Group was 1.33% firmer after it said full-year organic revenues and pre-tax profits had grown ahead of expectations amid "high demand" across the majority of its end markets.
Outside the FTSE 350, Made.com Group tumbled 20% by the close, after it put itself up for sale and announced plans to cut a third of its staff.
Reporting by Josh White at Sharecast.com. Additional reporting by Michele Maatouk, Abigail Townsend and Iain Gilbert.
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