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FTSE 100 on the right track to finish volatile week within the green as gilts suffer

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FTSE 100 ends volatile week within the green during a shaky period for UK assets as sterling and gilts come under pressure

  • FTSE 100 closed up 89.01 points at 7351.07 on Friday
  • It has been a volatile week for UK assets as markets react to latest Government
  • The Government’s spending plans could cost £130bn but reduce inflation 
  • The Bank of England has delayed its next MPC meeting until 22 October 

UK stocks ended what has been a volatile week for UK assets firmly in positive territory. 

The FTSE 100 closed up 89.01 points at 7351.07 on Friday, while the FTSE 250 was up 1.6 per cent. The blue-chip index saw two consecutive negative sessions prior to today.

Sterling recovered to trade at $1.16 against the US dollar because the Bank of England said it will postpone its next rate of interest decision until 22 September.

The FTSE 100 is about to finish the week within the green after a robust showing on Friday

The pound has been under pressure this week as markets reacted the appointment of Liz Truss as Britain’s latest Prime Minister, but it surely still looks to be on the right track to record broadly flat performance over five days.

10-year gilts have also had a greater day, with yields falling from Thursday’s closing price of three.162 per cent to three.095 per cent by late afternoon.

Nevertheless, gilts have sold off on average over the course of the week with the 10-year yield having traded at 2.91 per cent on Monday morning.

It followed an August that represented the worst month for 10-year gilts since 1986, with yields up 94 basis points, as markets adjusted to a different jump in gas prices and expectations of increased fiscal spending.

Rising gilt yields shall be of concern to Truss’ latest government, which is planning sizeable spending in efforts to support households and businesses through the difficult winter ahead, as this implies a rise in the fee of financing debt obligations.

Inflation hit 10.1 per cent last month and is forecast to go even higher, while the British economy is about to enter five consecutive quarters of contraction from the beginning of October, in keeping with the Bank of England.

The Government will go ahead with an energy price guarantee plan to freeze the common British household’s gas and electricity bill at £2,500 for the subsequent two years from 1 October.

This is about to cost the Treasury upwards of £100billion and suggestions that the Government will3 tax cuts will push borrowing even higher.

Chancellor of the Exchequer Kwasi Kwarteng told senior banking figures within the City earlier within the week that the Government’s plans will mean higher borrowing within the short term.

‘Because of the size of the gas crisis, the Government’s first priority shall be to support families and businesses within the immediate term,’ a press release said.

‘The Chancellor was clear this may mean vital higher borrowing within the short-term whilst ensuring monetary stability and financial discipline over the medium term.’

The Bank of England’s Monetary Policy Committee will now meet later than planned to debate next steps in its approach to controlling inflation.

Markets expect the bank to hike rates by one other 50 basis points to 2.25 per cent, but some economists consider it should go for a 75bps hike.

Nevertheless, the potential for an Emergency Budget to be put forth before 22 September could give the MPC more to take into consideration when it makes its decision.

Modupe Adegbembo, G7 economist at AXA Investment Managers, said: ‘The cap in energy prices takes 3 percentage points off our expected peak of inflation.

‘We now see inflation rising to 10.6 per cent in October in comparison with 13.6 per cent in January 2023 before.

‘The implications of the policy on public funds just isn’t yet clear. Full costings are expected later this month in Chancellor Kwarteng’s fiscal event and can likely cost greater than £130billion.

‘Assuming this were to be fully debt financed, this is able to add slightly below 5 per cent of GDP to the extent of debt and certain leading to deficits of around 5 per cent of GDP each this yr and next, compared with March’s Office for Budget Responsibility forecasts of 4 per cent and a couple of per cent.

‘Despite reducing the height of inflation, we expect the MPC might want to go further to make sure inflation returns to focus on because the economy will unwind the assumed excess demand slower than would otherwise be the case.

‘On balance, we now expect the MPC to extend rates by 75bps [this month]…and pencil in 50bps hikes in November and December bringing rates to three.5 per cent.’

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