Must read: chancellor’s U-turn on 45% tax, the pound, BP and Shell

Fierce criticism of his decision to cut the higher rate tax rate has forced the new chancellor to ditch the plan, sending the pound higher against other currencies. Our head of investment explains.

GLOBAL MARKETS 

It was a mixed session overnight in Asia to kick off the fourth quarter, with the Hang Seng trading at 11-year lows, while the Nikkei gained more than 1%. European markets have opened lower, with the FTSE 100 under pressure. 

Oil giants Shell (LSE:SHEL) and BP (LSE:BP.) are bucking the weakness on reports that OPEC+ could be planning a significant output cut. 

UK housebuilders like Barratt Developments (LSE:BDEV), Berkeley Group Holdings (The) (LSE:BKG) and Persimmon (LSE:PSN) are also outperforming following the government’s fiscal rollback.

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UK TAX U-TURN 

The UK government has staged a U-turn on its plans to scrap the 45p rate of income tax. Chancellor Kwasi Kwarteng has confirmed the abolition of the top rate of tax paid by those earnings over £150,000 will no longer be carried out. It comes after a growing number of Conservative MPs expressed concerns over the tax plans, with fears from the Truss administration that the proposal would fail to get sufficient support in the House of Commons.  

Sterling is moving higher but has pared back its more convincing gains from earlier in the session, trading modestly in the green against the dollar, euro and Japanese yen. The pound has been staging gains after hitting a record low last week following Kwarteng’s mini budget announcement. Despite attempting to regain ground in recent sessions, cable (GBPUSD) is still down by more than 17% since the start of the year, causing pain for UK importers and adding to Britain’s inflationary conundrum.  

The Chancellor’s mini-budget sparked a major sell-off in the UK gilt market last week, prompting emergency intervention from the Bank of England. The dysfunction in the bond market has forced the Bank of England to carry out conflicting policies; one to stem inflation and another to avoid financial contagion. It is having to buy long-dated gilts to prop up its sovereign bonds and the pound. Meanwhile, it is likely to carry out a jumbo 100 basis point hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment.

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On Friday, ratings agency Standard & Poor’s cut Britain’s sovereign debt rating from ‘stable’ to ‘negative’ and said it expects the UK to enter a technical recession in the coming quarters, shrinking by 0.5% in 2023.

OIL

Oil prices are trading higher by almost 3% amid reports that OPEC+ is considering its biggest output cut to support the markets since the pandemic. The cartel is understood to be mulling a reduction of over a million barrels per day to offset the recent declines for the market. 

Oil prices have shed around a third of their value since the peak in June, with four straight months of declines weighed down by US dollar strength and concerns about the negative trajectory for the global economy. 

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Traders are weighing up potential strength from an OPEC+ production cut versus downside pressure from rising interest rates globally and weakening demand, particularly from the world’s second largest economy, China.