A boring Budget, but anything but boring markets

Our head of investment examines the key points from today’s Spring Budget amid an extremely volatile week for financials.

The Budget

Jeremy Hunt said the UK will not enter a technical recession this year. However, the economy will still shrink by 0.2% in 2023 versus November’s forecast for a decline of 1.4%. The OBR estimates inflation will fall to 2.9% by the final quarter of 2023, but unemployment will rise to 4.4%.

• Invest with ii: Top UK Shares | How to Start Trading Stocks | Open a Trading Account

The chancellor wanted today’s Budget to be boring, but markets are anything but that. Today’s sell-off across equities with sharp declines in the banking sector have overshadowed the impact from the Treasury’s fiscal plans for spending and taxation. Losses have accelerated over the last hour with the FTSE 100 nursing a painful loss of 3%, while the FTSE 250, which is much more closely correlated to the UK economy and in turn the Budget, is also down sharply by 2.6%.

Investors are flocking to safe-haven stocks such as silver miner Fresnillo (LSE:FRES) and utilities such as Severn Trent (LSE:SVT) and United Utilities (LSE:UU.), while financials and oil stocks are at the bottom of the FTSE 100 weighed down by the turmoil in the banking sector, which has raised recession fears and in turn reduced the outlook for oil demand with WTI and Brent crude down around 4%.

Despite attempts by the chancellor to paint a rosy picture with improved figures on growth and inflation, the strain in the financial sector is yet another headwind to contend with. The market turmoil and the economic fallout are paving the way for a much smaller chance of a rate hike from the Bank of England this month. Interest rate futures are now pricing in a 60% chance the central bank opts for no change at its next monetary policy committee meeting.

The Budget has done little to budge the pound, which is down against the US dollar but higher against the euro. Fear of a financial crisis is weighing on the eurozone currency, which has slumped more than 1.7% against the greenback.

Banks in turmoil

Markets across Europe are sliding again today amid existential concerns about the future of Credit Suisse (SIX:CSGN). Its biggest backer, Saudi National Bank said it will not provide further financial support in the latest blow to the embattled lender. This week, Credit Suisse said it found ‘material weakness’ in its financial statements, just weeks after reporting a net loss of £6.6 billion in 2022, the largest since the 2008 global financial crisis. The Swiss bank has been embroiled in a number of scandals in recent years, resulting in major outflows and a slide in investor confidence.

• Bank stock suspensions spread fear across financial markets
• UK bank shares and what happens now after SVB’s collapse

The Swiss bank has plunged over 20% today and its five-year credit default swaps (CDS), which gauges the cost of insuring against Credit Suisse’s bonds have soared to a record high, underscoring the increased nervousness among investors. Contagion has sparked weakness across the sector weighing on other European banks such as Credit Agricole (EURONEXT:ACA), BNP Paribas (EURONEXT:BNP) and Barclays (LSE:BARC).

It comes amid an already extremely volatile week for financials following the collapse of SVB Financial Group (NASDAQ:SIVB), which caused the largest lenders in the UK to suffer a £50 billion slump in combined value on Monday.

• Budget 2023: here’s how and why pension rules are changing

Key points announced by the chancellor

• The Energy Price Guarantee £2,500 cap for the typical household will remain for the next three months. Prepayment meter charges will come in line with comparable direct debt charges, removing the energy premium paid by the poorest families
• Corporation tax will increase from 19% to 25% from April for firms making profits over £250,000
• Small businesses will see the Annual Investment Allowance increase to £1 million so that most businesses can deduct all investment against taxable profits
• 12 investment zones have been announced across the country including at least one in Scotland, Wales, and Northern Ireland
• £11 billion will be added to the defence budget over the next five years, amounting to nearly 2.25% of GDP by 2025
• Helping pubs with tax on draught products, making duties more competitive versus the equivalent in supermarkets
• £63 million investment into public leisure centres to keep swimming pools ‘afloat’
• Funding a voluntary employment scheme for disabled people with 50,000 places a year to help disabled people get back to work
• Abolishing the lifetime allowance for tax-free pension contributions
• Raising the annual cap on tax-free pension contributions from £40,000 to £60,000
• Encouraging more older people to return to the workforce
• Reforming childcare, including wraparound care from 8am until 6pm, from 2026 and incentives to encourage more people to become childminders 
• In eligible households, introducing in stages 30 hours of free childcare for all children over the age of nine months, worth an average of £6,500 a year
• Announcing a £1 million prize for AI research