It is budget day in the UK, but investors have plenty else competing for their attention. Chancellor John Healey presents the budget in a few hours, with earnings also due from Standard Chartered, Unilever and GSK. The UK's run-up to its fiscal event has been relatively calm in market terms, but gilt yields remain historically very high. Healey has roughly half the fiscal headroom his predecessor had, owing to the war in Iran pushing up borrowing costs. Healey has pledged fiscal prudence, and the budget will need to be carefully costed.
Even if he sticks to that pledge and any measures are well received, bond traders have reason not to be complacent. The US Federal Reserve announces its interest rate decision tonight, and global bond markets will be watching Fed Chairman Kevin Warsh's description of financial conditions, with expectations of a December hike potentially in the balance. The European Central Bank's policy meeting this week also takes place against intensifying bond stress and rising inflation.
The Middle East situation remains volatile, with Brent crude still trading well above $110 a barrel. Domestically, some have warned about sterling. Fiscal conservatism may placate bond markets but is unlikely to do much for growth. The relative resilience seen in recent months could easily erode as consumers feel the pinch of higher energy prices, especially if global uncertainties push borrowing costs higher still.
Live coverage of the UK budget begins at 11 a.m. on the Markets Today blog.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing