POLITICS TAKES CENTRE STAGE AS CHANCELLOR TAKES FINAL CHANCE FOR A PRE-ELECTION GIVEAWAY

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Data Sourced from FE Analytics, and Bloomberg Finance LP

POLITICS TAKES CENTRE STAGE AS CHANCELLOR TAKES FINAL CHANCE FOR A PRE-ELECTION GIVEAWAY

This week has been all about politics. The US presidential primary season ended as Nikki Haley withdrew from the Republican contest. With no official challenger to Joe Biden among the Democrats, it is now a two horse race between Biden and Donald Trump to the election in November. Meanwhile, China’s biggest annual political event, the National People’s Congress, also concluded this week. The congress brought confirmation that China’s target for annual GDP growth will remain at 5%. However, there were no new policies designed to meet the ambitious growth target.

In the UK, Jeremy Hunt used the budget for a few pre-election sweeteners. Under pressure from backbenchers to come up with a tax cut or two, the chancellor opted for another cut to national insurance. Not only can be it be presented as pro-growth and rewarding work, it is also cheaper than cutting income tax. The government will be relieved that the economic outlook has improved slightly but all in all it was a low key budget. There was nothing to move markets and the government will need more than a small NI cut or 0.1% increase in GDP to turn its fortunes around.

UK: MARKETS STEADY AS GOVT INCREASES BORROWING TO FUND TAX CUTS

Chancellor Jeremy Hunt unveiled tax cuts and increased the amount the government is set to borrow as he presented the last budget before the general election. The main news was a further cut to employee national insurance as the rate will fall from 10% to 8% from April. The chancellor also extended the freeze on fuel and alcohol duties. Tax raising measures include plans to scrap the ‘non-dom’ tax regime which is intended to raise £2.7bn a year by taxing overseas assets of UK residents. There is also a new tax on vaping and the windfall tax on oil and gas producers is extended.

The economic outlook was upgraded as the Office for Budget Responsibility said GDP should grow 0.8% this year – up from 0.7% – and expects growth of 1.9% in 2025. The OBR also forecast that inflation will dip below 2% in the next few months. The combined measures will see government borrowing of £265.3bn in 2024-25. This was higher than expected but not enough to upset bond markets and gilt yields have fallen over the course of the week.

RATES: ECB ON HOLD AS US FED REMAINS COOL ON TIMING OF FIRST CUTS

The European Central Bank left interest rates unchanged at 4.5%. However, the bank opened the way for future rate cuts as it reduced its forecast for inflation. It now expects consumer inflation to fall to 2.3% this year, down from 2.6%. Inflation has been falling in the last few months, although it remains patchy as low inflation in some peripheral countries is offsetting higher rates in some of Europe’s larger economies.

In the US, Federal Reserve chair Jerome Powell presented a cautious outlook for interest rate cuts when he testified before Congress. He said rates are likely to be cut this year but the strong labour market and robust economic growth mean it is too early to cut now. Powell insisted the Fed needs more evidence that inflation is moving sustainably back towards its 2% target before rates will be reduced. The better news on inflation helped government bonds to rise in value and pushed yields down. Despite Powell’s cautious tone, the potential for US rate cuts helped most major currencies rise against the dollar.

EQUITIES: BIG TECH FACING MORE REGULATORY HEADWINDS

Big tech companies have been the main driver of recent US equity growth. The size and speed of the gains have raised questions about whether valuations are sustainable, but tech firms have generally met ambitious earnings targets. Increased attention from global regulators is also a concern for revenue growth. On Monday, Apple was fined €1.8bn for unfairly promoting its music streaming service in preference to rivals and regulators and legislators are increasingly willing to take on big technology firms.

The Digital Markets Act came into force in Europe this week and Apple is already under investigation for excluding a company from its app store in a dispute over revenue sharing. The UK and US are also looking at curbing the commercial power of big tech. A digital markets and competition bill is currently going through Parliament, while the American Innovation and Choice Act is progressing through Congress. However, investors have been undeterred by the threat of more regulation as many see little impact on earnings growth.

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