The UK Budget was, as we had expected, mostly politically focused and only had a limited impact on UK markets. The biggest response was from the oil sector. UK Chancellor, George Osborne, announced new measures to boost investment in the North Sea oil sector, which has struggled with the declining oil price.
Big UK oil companies have seen their share prices rise for the second day. BP’s share price is up nearly 2.5% so far on Wednesday; however, it took a mini-dive on Osborne’s announcement of GBP 1.4 bn of tax cuts and investment measures to boost the North Sea facility, before staging a recovery. Overall, we think that the measures, although welcome and potentially good news for jobs in the industry, will be trumped by the oil price decline, and the bearish supply data. Crude oil inventories rose to one of their highest ever levels last week of 9.6mn barrels. This could limit the upside for energy stocks and the FTSE 100.
FTSE 100 gets a boost:
The North Sea oil news has helped to boost the FTSE 100 today, the oil sector is approx. 13% of the entire index. The FTSE is up more than 1% post Osborne’s Budget announcement on the back of the energy sector’s success. Although the banking sector was smacked with a rise in the bank levy to 0.21% in this Budget, it has been partly neutralised on the shelving for nine months of new rules for financial firms to post margin for OTC derivatives. HSBC, the UK’s largest company by market cap, has seen its share price rise more than 1.5% so far today, even though it received a downgrade from Barclays earlier. This is helping the FTSE 100 on its way to the next key level of resistance at 6,974 – the record high from 2nd March, as investors ditch European markets like the Dax in favour of the UK index in light of some of the measures included in the Budget.
Budget focuses minds on GBP political risk:
This budget is FTSE 100 positive, but not pound positive. Sterling hasn’t recovered from the sharp sell-off post the weaker than expected labour market data that was released earlier on Wednesday. GBPUSD dipped to a near 5-year low of 1.4635 while Osborne was speaking even though the UK’s growth forecasts were revised up, and deficit forecasts revised lower. Not even news that public spending cuts could end a year earlier than expected helped sterling. While there was nothing particularly GBP negative in this Budget, it was extremely political, which may focus FX minds on the upcoming election and the risk this entails.
Political risk is one of the key factors driving sterling lower, and the forecasts included in this Budget may be rosy, but in fairness, this election is expected to be so close that the UK’s economic landscape could change come 8th May. Thus, the market is almost disregarding the “good” news included in this Budget and instead focusing on the political uncertainty that will grip the UK in the coming months and, in our view, may continue to weigh on sterling.
Other points worth noting in this Budget include:
- Better growth and deficit forecasts.
- Rise in minimum wage confirmed at GBP 0.2 per hour.
- Rise in threshold for higher rate of tax.
- Measures to boost personal saving.
- Pledge to reduce the UK’s long term debt burden.
Estimates suggest that this budget will bring in a net GBP 745mn, so Osborne has stuck to his guns and delivered no free giveaways. Interestingly, this is impacting the pound more than the FTSE 100, which is running with the good news for the oil sector.