The FTSE 100 (^FTSE) and European stocks ended the week with a sell-off while US stocks were mixed as anxieties crept in regarding the probability of the Federal Reserve holding interest rates and pre-budget turmoil for the UK government.
The tepid trade in the US followed Wall Street’s steepest sell-off in over a month as ebbing faith in a December interest-rate cut puts pressure on riskier assets like Big Techs.
Traders now see less than 50% odds of a quarter-point rate cut next month, down from about 95% a month ago. Minneapolis Fed President Neel Kashkari became the latest to lose appetite for rate cuts as he flagged “resilience” in the US economy and continued concerns over inflation.
London stocks wavered and British bond gilt yields rose as traders digest more uncertainty around the direction of the UK government’s 26 November budget, with chancellor Rachel Reeves pulling back from plans to hike income tax, according to a report by the Financial Times.
Ten-year and two-year UK gilts were volatile following the report. The 10-year gilt yield jumped 0.13% to 4.57%, while the two-year gilt yield added 0.06% to 3.82%.
Reeves has reportedly scrapped widely expected plans to raise the basic and higher income tax rates, the report said. Those plans were relayed to the Office for Budget Responsibility (OBR), the body which scrutinises and forecasts from government policy, on Wednesday.
Read more: Budget 2025: Starmer and Reeves ditch plans to raise income tax
Instead of raising income tax, Reeves is reportedly looking to trim the thresholds at which people pay different rates of income tax, while leaving the headline rates unchanged.
According to reports on Friday, strength of tax receipts has improved forecasting from the OBR, allowing for the U-turn. The fiscal hole Reeves has to plug is now more like £20bn, the watchdog said, down from earlier forecasts of up to £35bn.
This is particularly the case on stronger wage performance: the higher wages are, the more tax is paid on them. A downgrade in productivity has also not been as bad as was first feared.
“The problem with not raising income tax is that’s its mechanically the best lever – otherwise, faced with such a large black hole, you have to scratch around with a load of smaller things, pulling all kinds of levers that mess with all sorts of things and probably squeeze growth even more, and you just need to come back for more,” said Neil Wilson, UK investor strategist at Saxo Markets.
“Moreover, the market thinks you lack credibility in terms of filling the black hole and raising headroom.”