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Budget 2010 and election countdown

One week after the budget was announced by the Chancellor Alistair Darling, we review what have been the key headlines across the markets and investment community alike and assess how the budget has been digested.   In what could possibly have been this Chancellor’s last ever budget, market commentators where keen to see if there would be any big surprises coming out of his investment battle box in the run up to a much anticipated 6 May  general election.  We also take a step back through time and review the performance of markets in previous battles for 10 Downing Street and see if this holds any insight for the coming 12 months.

The market response has been relatively muted since the Chancellor’s budget announcement with just an eleven point change on FTSE opening levels from Wednesday 24 March to Wednesday 31 March.  This is perhaps to be expected given the relatively uneventful budget and an overall mood of uncertainty continuing ahead of the general election and a potential hung parliament.   All eyes now turn to the election campaign calendar and some key dates.  With the exact timing of the election at the Prime Minister’s discretion, the latest possible date is 3 June.  However with current consensus of a general election being held on 6 May it suggests that an announcement will be made in the next couple of weeks.  The battle lines have now been drawn and in the subsequent week from the budget announcement we have started to see a shift in engagement from the political parties with the prospective Chancellors taking to the stage via Monday night’s live televised debate.  We now enter into a pivotal period for markets and investors alike as portfolios and trading strategies are reviewed to take account of the changing political and economic landscape.  You can keep track of these developments by logging into your account and visiting the Market news and data section where you can build watchlists on specific stocks or sectors that you believe could be affected helping you proactively manage and stay in control of your investment decisions.

For some commentators it is perhaps still too early to make any firm commentary on the impact the budget is having on the market however our colleagues at Barclays Wealth Advisory and Financial Solutions have provided some suggestions on where they see opportunities on the investment horizon.   For example as the election approaches they make the following four observations for portfolios depending on the investor’s outlook:

• Highest conviction: underweight gilts
• Next highest: stay positive on UK equities
• For the brave: buy sterling now on a 6-9 month view
• For the nervous: buy currency and equity put options as portfolio insurance

Of course, it is important to note Barclays Stockbrokers does not give advice.  If you are in any doubt as to the suitability of investments specified in this Investment ViewPoint, please seek professional financial advice.

Taking a closer look at last weeks announcement we recognise that little has changed or is likely to change from a macro-economic perspective.  Whoever wins the election will still have to steer the UK out of its current budget deficit.  And with manifestos yet to be published it remains unclear what definitive path will be taken by the respective parties to tackle the budget deficit.  Markets are waiting.  Historically any correlation between markets and UK elections has been inconclusive however the table below perhaps provides some interesting insight.  On average equities and bonds have grown by 3.6% and 4.4% respectively in the six months leading up to an election with bonds continuing to perform reasonably well in the six months after the election posting an average gain of 5.2%.  Historically a Labour government has provided 3.2% and 5.4% growth in equities and bonds respectively in the six months after an election, while a Conservative Party win has shown equity markets have contracted by 5.4% with bonds bucking the trend and posting gains of just under 5% however, past performance is not an indicator of future returns.

Markets and elections – UK history

If you would like more information on which stocks are performing well in the run up to the election why not login to our Market news and data section and review the latest news and insight as it comes to the market.  Alternatively our is generally used as a helpful tool to keep track of the top traded stocks by clients through the Barclays Stockbrokers dealing desk

Regular followers of Investment ViewPoint will also be pleased to know we will be continuing to track market dynamics in the lead up to the general election.  You can stay in touch with these updates by logging in to your account and visiting the Investment ViewPoint Connect section of our website. 

Budget 2010: Immediate market reaction and insight

With a highly anticipated general election firmly expected to be held on 6 May, today’s budget announcement delivered by the Chancellor of the Exchequer, Alistair Darling has taken on extra significance.  As the UK government position themselves for the upcoming battle for number 10 Downing Street and speculation continuing on whether we will see a hung parliament, the economic agenda Darling sets out today will shape the immediate political battle ground and may ultimately influence who will be the eventual winner of the general election.  With markets continuing to look for certainty on which political party will win and therefore by default what economic measures will be used to cut the UK’s eye watering £167 billion budget deficit, this budget is no ordinary budget.
 
Today’s special Budget 2010 Investment ViewPoint takes a snapshot of the budget announcement as it is delivered. Over the coming days Investment ViewPoint will review the budget’s impact, not only on current investment approaches but how it could influence trading strategies in future months as markets reaction to the developing economic and political landscape beds in. So, as Alistair Darling details his strategy to maintain the UK’s return to positive economic growth, we take an at-a-glance look at the budget headlines relevant to you.

Personal Taxation

• Pre-announced increases i.e. introduction of 50% tax rate, erosion of personal allowances for individuals earning £100k+ and increase in national insurance contributions with effect from 2010/11 tax year all to proceed unchanged.
• Inheritance tax threshold frozen for 4 years
• No changes to VAT or income tax planned.

Fuel, Cigarettes and Alcohol

• Pre-announced increase in fuel duty to be phased between April 2010 and January 2011
• Duty on cider to be brought into line with other alcohol duties, equal to a rise of 10% above inflation
• Wine beer and sprit duty raised 2% p/a until 2013 Tobacco duty up 1% in 2010 and 2% p/a thereafter.

Business

• £2.5bn allocated to support skills and innovation development within small businesses
• £94bn gross lending by publically owned banks to small businesses
• One year reduction in business rates effective from October 2010-03-24
• Relief on capital gains tax for entrepreneurs increasing 100%.

Employment

• Decrease in qualifying time for over 60’s to receive work credits, with the current 6 month work / training guarantee extended till 2012
• Public sector pay rises capped at 1% from 2011.
  
  
  

View the Budget Alert 2010 from Enrnst & Young

Visit our Tax Centre to find out more about tax efficient investment products or login to our research centre to see how the budget announcement is being received in the markets.

You can find out how the budget is impacting currency markets through the BARXdirect: FX platform.

Special FX – blockbuster times for global currencies

As we approach the Oscars on Sunday, traders could be forgiven for thinking the last 18 months market conditions have come from a Hollywood studio!  It really has been unprecedented times for global economies which have made for exciting times in currency trading. 

With quantitative easing either stopping or slowing down in various economies around the world over the last few months, some commentators have suggested we may be in for a period of calm and stability in FX markets.  However like any good movie there is always likely to be a twist in the story and with continued rumblings of discontent in the Eurozone, market volatility could start to heat up once again

In February finance ministers from the European Union (EU) gave Greece an offer they couldn’t refuse by warning the Hellenic state to make significant budget cuts in order to remove any currency risk to the EU.  Greece must show by March 16 that the government is on track to cut its gross domestic product budget deficit from 12.7% to 8.7% in 2010.  And just this week we also observed the EU Commissioner for Economic and Monetary Affairs, Olli Rehn say “I am asking the Greek government to announce new measures in the coming days” suggesting all is not well in the land of myths and legends.  Subsequent responses from the Greek Finance Minister George Papaconstantinou suggested “The government will do whatever it takes [to cut the deficit]” Independent views on the matter suggest we could finally hear the Greek government shouting ‘show me the money’ in true Cuba Gooding Junior style as they finally bow to pressure to meet the needs of the EU.

This uncertainty has weighed heavily on the outlook of Eurozone nations who appear committed to helping Greece repay its debts mainly because if Greece defaults then this threatens to start a  European debt crisis which would undermine the euro. 
Across the water in Turkey we see continued unrest that is likely to impact the Turkish lira with the market continuing to keep a watchful eye on the investigation into the alleged military coup to topple the government.  The lira has recently hit a nine-month low of 1.5560 against the US dollar and while currency traders aren’t quite saying “frankly my dear I don’t give a damn” its fair to suggest this uncertainty will continue for the foreseeable future meaning further volatility for US Dollar vs Turkish Lira (USDTRY).

May the force be with the renminbi

Looking to the Far East there isn’t any big trouble brewing in little China with the globes most populous nation apparently on course for another strong performance this year.  Last year China was the third largest economy in the world behind the United States and Japan, but following respective performances in 2009 China looks set to roar and become the second largest economy in the world and finally overtake the land of the rising sun.  China’s economy expanded by 8.7% compared to Japan’s annualised 4.6% in 2009 and with both countries figures now so close it looks likely this will be China’s year to take second spot.  This growth is good news for emerging market currencies and Japanese Yen (JPY) crosses in particular.  Market analysts continue to monitor whether the Chinese renminbi will be revalued against the US dollar this year and with Barclays Wealth Research anticipating the renminbi appreciating in value this year we could see a distinct halo effect coming into play in the surrounding emerging market economies and currencies as they benefit from the increased trade flow that would likely materialise.

Looking closer to home, sterling continues to take a pounding and give cause for concern.  While markets work to avoid getting hung up on the impact of this years general election and the uncertainty of managing the UK’s fiscal deficit we have observed some interesting client trends recently on the BARXdirect: FX platform. A number of FX clients in recent weeks have suggested that GBP/USD had bottomed out and would rebound from 1.52-1.53 level; however sterling has fallen further to below 1.49, leaving traders pondering their next move in cable.  So can the politicians provide some certainty on how they will manage the UK’s recovery? And can sterling recover, put in an award winning performance and reverse the downward trend against the US Dollar and currency king of the world? 

Whatever your view on currency markets, why not test them by registering for our BARXdirect: FX demo account. You can trade with £50,000 virtual money allowing you to hone your trading strategy and participate in one of the fastest and most exciting markets in the world. And if you have experience and knowledge to trade for real, then why not open a BARXdirect: FX live account which offers online access to the world biggest market?

FX trading is a leveraged product which means you are required to deposit a fraction of the overall value of the trade. Profits and losses are magnified and so FX should only be used by experienced investors who are comfortable with the risks associated.