Client Update - 30th September 2022

A week is a long time in politics, or so the saying goes. I am sure Kwasi Kwarteng and Liz Truss may well agree. It seems a long time since I wrote last Friday as we digested the tax cuts and fiscal loosening of the “mini” budget – which evidently was not a budget but only a mere “fiscal event” as it was not accompanied by any actual figures from the Office of Budget Responsibility (OBR) to justify the tax cuts put forwards. The latter point seems to have been a significant error on behalf of the new chancellor as sterling headed south, equities joined in and even the International Monetary Fund took the unusual decision to criticise the cut in the highest rate of income tax. A week later and the Bank of England have stepped in to protect the sterling currency and reverse their previous decision to sell £80bn of bonds on a monthly basis from October, instead being forced to buy £5bn of debt every day over a thirteen working day period to stabilize the rapid fall of sterling against the dollar and protect pension funds from a liquidity crunch. So far, this initiative has worked and as I write, the sterling / dollar exchange rate is back to where it was a week ago, at a touch over $1.12 dollars for your pound.

Today the above-mentioned politicians head off to meet with the OBR to try and thrash out some figures that may further calm market tensions, although the UK mortgage market may need more than a little encouragement after last weeks turmoil. As an example, not long ago Nationwide offered a 1.5% five-year fixed rate mortgage, a few weeks later, the offer to homebuyers is 5.49% and expected to rise further. Estate agents report the collapse of many deals across the country as buyers nervously eye any further action from the BOE to raise rates before their next meeting on the 3rd November.

The diary for the next eight weeks is very interesting. We will see if there is enough pressure exerted on the chancellor to release the abridged OBR figures discussed today, we then have US inflation figures on the 13th October (these were higher than expected this month), then a US Federal Reserve meeting on the 1st-2nd November, swiftly followed by the BOE the day after, then a full set of figures from the OBR on the 23rd November. By the final date, we will have a much better understanding of the state of the UK economy, how willing global investors are to buy UK assets and how secure in their new roles our Prime Minister and chancellor are.

The swift actions of the BOE this week have certainly stabilized the situation for now, however the political damage to the Conservative party as they head into their party conference has been severe, with yesterdays YouGov poll showing Labour have a huge 33 point lead over the Conservatives - the highest for almost thirty years. According to BOE data reported in the Financial Times today, more than 2 million borrowers with fixed term mortgages will need to remortgage over the next two years and with the cost-of-living crisis already eating into disposable incomes, the future travel of UK interest rates will be sharply scrutinised.

Despite all the negativity, UK markets are recovering lost ground today and it is another often used phrase that markets climb a wall of worry. Our investment teams current defensive positioning is proving a shrewd move in the current uncertainty and when better news and more visibility on the governments figures arrives, we see no reason why markets cannot recover and move forwards. Do have a good weekend.