The FTSE 100 was sharply lower on Tuesday after Rachel Reeves delivered a highly unusual speech setting the scene for tax hikes at the upcoming budget.
The Chancellor repeatedly refused to rule out tax hikes in a inpromptu speech made early on Tuesday morning that focused on challenges for the economy.
“The scale of the financial challenges for the government right now mean the Budget is likely to involve some incredibly tough decisions,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“The fact this speech has been made at all is likely to demonstrate that the government wants to highlight its position: to meet its fiscal rules, it’s likely to have to make spending cuts and raise significantly more tax.”
The gilt market initially reacted positively to Reeves’ speech and the promise of continued fiscal discipline.
“The bond market would be happy if the chancellor raises taxes as it would help to improve public finances and make the UK less risky from an investment perspective,” explained Dan Coatsworth, head of markets at AJ Bell.
Although the FTSE 100 fell 0.8% on Tuesday, the decline can’t be entirely attributed to the Chancellor’s speech. There were also sharp declines across Europe on Tuesday, with the German DAX falling over 1%.
The weakness in European markets was set in motion after the US cash markets closed last night by a disappointing reaction to US AI darling Palantir’s earnings.
“The stock had already come off its highs toward the end of regular hours, closing 3.5% higher, but after-hours trading saw that gain wiped out and by the end of the day the shares were looking at losses of around 3%, marking a retreat of almost $50 billion in value from the earlier high point,” said Steve Clayton, head of equity funds, Hargreaves Lansdown.
“Investors began to question the valuations of AI more broadly, reflected in falling futures markets.”
London’s cyclical sectors were the hardest hit, with miners and financials dominating the bottom of the leaderboard.
Antofagasta and Glencore both fell more than 3%.
BP’s fairly respectable Q3 results were smothered by broader negative sentiment, and shares were trading largely flat at the time of writing.
“BP’s latest quarter was a solid if unremarkable affair,” said Chris Beauchamp, Chief Market Analyst at IG.
“Underlying replacement cost profit came in at $2.2 billion, with strong cash flow helping to offset a higher tax bill and weaker trading performance.
“For investors, the consistency will be welcome, but the question is whether there’s much upside left in the shares without a meaningful rebound in energy prices or a return to stronger trading.”
AB Foods was the FTSE 100’s top faller after releasing sharp declines in profit and said it was considering breaking the group up to unlock value in Primark.