The government must have done a terrific spin job on us before the budget because most of us feel like we were let off lightly even after the cuts and tax hikes that were announced yesterday. The markets certainly seemed to like the fact that the coalition is tackling the immensity of government debt and waste because Sterling, which had weakened earlier in the day, strengthened across the board in later trade. The reaction to the budget was predictable enough with retailers warning over the VAT rise and those with a vested interest warning about everything else but Labour’s attack on the Lib-Dems who they obviously see as the weak link in the coalition, was more aggressive than had been anticipated.
I am sure George Osborne and David Cameron will feel the Credit referencing agencies have probably been appeased for now and that at least buys Britain some time. In making the deadline a short one, the Chancellor minimised the potential to avoid the Capital Gains tax increase but those who could avoid the rises in Capital Gains Tax made their moves yesterday afternoon. Andy Harrison, chief executive of easyJet, reportedly saved himself over £190,000 by dumping easyjet shares in the lead up to the budget and then more before the chancellor had even sat down. It makes you wonder whether the latter months of the year will be bumper ones for retailers as people rush to get their larger goods bought before the 2.5% hike in VAT start in January.
So we start this fateful day in fairly buoyant mood and let’s all hope we end it in similar fashion. We have to rely on a group of footballers who haven’t stepped up to the plate yet (I know that is a sporting mixed metaphor but you get my point). I wonder though if all those flags waving from car windows have a black flag option or can be flown at half mast if circumstances dictate such a thing to be appropriate.
As for the rest of the markets, well the big news this morning will be the UK mortgage and lending data which is probably going to disappoint even though there appear to be more properties being sold. The tighter lending criteria and larger deposit stipulation son most mortgages now, is making it hard for lenders to find suitable borrowers and remortgages are even harder when many house prices are still below levels of a couple of years ago. We will also got the minutes from the last Bank of England meeting at which they left the both the interest rate and quantitative easing program on hold. We expected the voting to have been unanimous on both counts but we were prepared for a surprise and we got one when it was announced that Committee Member, Andrew Sentence voted for an interest rate hike to try to ward off inflationary pressures. Sterling will gain some strength from news like that.
This afternoon’s major stories are the decisions by the US Federal Reserve over interest rates and there is an outside chance of a surprise here as well. I think we would be amazed if the Fed were to raise interest rates but there is a possibility that they will start to talk about when that might happen and to discuss the reduction of their asset purchase plan. We are looking for changes to their previous statements where they pledged to keep the federal funds rate at “exceptionally low levels .....for an extended period of time.” Any change to these elements of the statement will be seen as positive for the US Dollar. The US Dollar is a little weaker today than it was a month ago due to the increase in confidence amongst investors who are more likely to sell the US Dollar and buy the likes of the Australasian Dollars and South African Rand if they are in search of higher interest rates rather than just plain old security.
The euro remains quite weak after French bank, Credit Agricole warned it would take a sizable write down against losses at its subsidiary Greek bank Emporiki. This followed a credit ratings downgrade of another French bank earlier in the week and warnings of further losses in Spanish Banks by one of the credit ratings agencies. It seems somewhat ironic that the abject failure of the credit ratings agencies is at the heart of the 2008 economic collapse but they are still pulling the strings as we struggle to recover. Nevertheless, if they are calling the Spanish story right, we can expect further Euro weakness in the weeks ahead.
And that is about it for today. I know you are itching to get away and plan your football watching. Beer, snack and crisp consumption will undoubtedly soar as the afternoon wears on and ‘Resolve’ and ‘Pro plus’ sales will soar tomorrow. Let’s all hope we are recovering from a celebration rather than a wake and, as they say on the terraces, COME ON ENGLAND.