London’s flagship index was firmly in the red on Thursday as the budget implications hit sentiment and a US tech sell-off compounded a risk-off tone to trade.
The FTSE 100 was down 0.7% to 8,099 at the time of writing.
Although yesterday’s budget wasn’t as bad as many had first feared, it was still broadly negative for UK companies.
Increased National Insurance will raise business costs and erode profits, and the hike in capital gains tax will dent investor enthusiasm. Frozen corporation tax is a minor win for UK businesses, but it is very minor in the context of the £40bn tax hikes announced yesterday by Rachel Reeves.
Forecasts of increased government spending and borrowing have raised gilt yields, which doesn’t bode well for interest rate cuts. Everyone knows this isn’t good for stocks.
“Yesterday’s relief rally after the Budget didn’t last long,” said Russ Mould, investment director at AJ Bell.
“Gilt yields jumped after the market cottoned on to a big increase in government borrowing over the next five fiscal years and that extra tax income from changes announced in the Budget won’t appear overnight.
“That means interest rates could stay higher for longer which is not good for housebuilders and retailers hoping for reduced pressures on household finances, hence why those sectors were in the red today. It also explains why banks were among the select few risers on the FTSE 100 as they stand to benefit from a stronger interest rate environment as they can charge more for lending.”
As alluded to by Russ Mould, yesterday’s rally in the housebuilders was turned on its head with Persimmon, Barratt Redrow, and Taylor Wimpey all down 3% or more.
The government pledge for £5bn to build houses isn’t going to do much good if buyers can’t afford to climb the property ladder and landlords dump properties because buy to let doesn’t make financial sense anymore.
Smith & Nephew was the FTSE 100’s loser after it reduced its revenue growth guidance amid weakness in China. Shares were down 12% at the time of writing.
“The largest UK medical devices maker, Smith & Nephew, has cut its full year revenue growth forecast based on weaker than expected performance in China. Lower demand in the surgical business has seen the trimming of the forecast from 5-6% down to 4.5%, a significant shortfall and shares are hurting for it this morning,” said Adam Vettese, market analyst at investment platform eToro.
The prospect of higher interest rates helped Lloyds and Natwest carve out minor gains while Shell rose 1% on a fresh $3.5bn share buyback.
Over 90% of the FTSE 100’s constituents were in the red at the time of writing on Thursday.