Weekly market commentary

Market review

Chancellor Rachel Reeves delivered her second budget on Wednesday, setting the tone for the remainder of the current parliament. Whilst the Office for Budget Responsibility (OBR) slightly upgraded their growth expectations for 2025, to 1.5%, they downgraded growth forecasts for 2026 and beyond, reflecting ongoing economic headwinds. Fiscal headroom was revised upwards, doubling to £22bn by 2029-30, but Reeves emphasised that the UK's net financial debt will reach £2.6tn this year, meaning one in every £10 of government spending is now allocated to paying debt interest.

A key budget decision that was hotly debated in parliament was the extension of frozen income tax thresholds for an additional 3 years, to 2031. A measure first implemented by conservative chancellor Jeremy Hunt, freezing income tax thresholds is a mechanism of fiscal drag whereby income tax bands remain static as average wages rise, gradually pulling more people into higher income tax brackets. This increases government revenue without changing the headline tax rates, effectively tightening fiscal policy through what is often referred to as a “stealth tax”.

Reeves further reiterated her commitment to fiscal discipline, with self-imposed rules preventing borrowing for day-to-day spending and requiring debt as a proportion of GDP to fall by 2029/30. This budget is projected to return a surplus of £3.9bn by 2028/29, however many of the revenue raising taxes are backloaded into later years, meaning if economic growth falls short of forecasts, the fiscal headroom may begin to erode.

Bond markets reacted to the budget with a modest rally in UK Gilts, with the yield on the 10 year gilt ending the day 0.1% lower, reflecting investor confidence in Reeves’ fiscal discipline. Equity markets posted gains over the week, with major indices recovering most of the losses incurred earlier in the month during the AI-driven sell-off. Sentiment was buoyed by headlines pointing to progress on ending the Russia/Ukraine conflict, signs of constructive dialogue between the US and China and a renewed focus on rate cuts.

Outlook

Investors remain reactive to a mix of economic and geopolitical signals, generating volatility around key data points and announcements, while question are beginning to be asked of Tech valuations and Private Credit stability. As we come towards the end of Q3 earnings season, results broadly suggest that demand from consumers and businesses remains robust. As inflation trends diverge and labour markets evolve, central banks may take increasingly different paths -raising the potential for greater dispersion across asset classes and regions in the period ahead.

Movers table