Item 1 of 2 Financial markets data and information are displayed on a screen inside the LSEG (London Stock Exchange Group) headquarters in Paternoster Square, London, Britain, April 25, 2025. REUTERS/Toby Melville
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“Markets are looking for signs of credibility through meaningful fiscal consolidation,” said Laura Cooper, head of macro credit and global investment strategist at Nuveen.
“That means front-loading revenue-generating streams to build up a cushion for the future.”
Here’s a look at how the budget is shaping up for markets.
1/ BOND MARKETS ON ALERT
Having fallen sharply in October, Britain’s 10-year borrowing costs on Friday saw their biggest one-day jump since July.
“Without income tax, can the government raise enough revenue to avoid landing in the same fiscal squeeze over the coming year again?,” said State Street Investment Management macro policy strategist Vladimir Gorshkov.
Berenberg senior UK economist Andrew Wishart said keeping Labour’s pre-election promise not to raise the main taxes would make it difficult for Reeves to increase her fiscal headroom.
Berenberg calculates that each 1 percentage point increase in income tax rates would raise over 10.5 billion pounds in 2029-30.
2/ STERLING BECOMES A BUDGET WEATHERVANE
Investors have rounded on the pound, at its lowest in months, as the most likely victim of budget disappointment.
“Fiscal drag in the UK will put further pressure on the pound,” said Brown Brothers Harriman senior markets strategist Elias Haddad.
At around $1.31, sterling is set for a third consecutive monthly decline against the dollar, and is near its lowest levels since April 2023 versus the euro , .
Eren Osman, head of investment management at Arbuthnot Latham, said he was positioned for further sterling weakness because tax hikes and spending reductions would push the Bank of England towards rate cuts.
3/ WATCH RETAILERS, HOMEBUILDERS
Nuveen has a preference for large-cap stocks because they are more exposed to the global economy, Cooper said.
4/ DON’T FORGET BANKS
Bank stocks too have been whipped around by pre-budget speculation, especially now Reeves appears to have ruled out income tax rises.
“There’s been some selling-off for the banking sector, which you could expect to be under the spotlight for taxes,” said Rory McPherson, CIO at Wren Sterling.
5/ BOE RATE CUT BETS
Money markets are pricing in a roughly 75% chance of a December rate cut from the BoE amid signs that inflation is easing. Such speculation could increase if the budget is seen as weakening the outlook for economic growth.
“What you want is the BoE to be in a situation or in a position to cut more, so on one hand, not too much drag on growth from austerity and not too much impact on inflation as well,” said Barclays head of equities Emmanuel Cau.
Any post-budget selling of gilts could be cushioned by rising rate-cut expectations.
Reporting by Joice Alves, Naomi Rovnick and Dhara Ranasinghe. Additional reporting by Samuel Indyk and Lucy Raitano. Graphics by Alun John. Editing by Mark Potter
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