Jitters over Budget borrowing rise

There was a sell-off in the UK bond market as investors digested Labour’s first Budget in 15 years. The market initially took Chancellor Rachel Reeves’s £40bn in tax increases in its stride, but the yield on gilts jumped in the following days as the market digested the implications for UK borrowing as many of the tax rises came with a delay.

The third-quarter earnings season continued, with a sell-off in mega-cap technology groups Microsoft and Meta Platforms after their outlook statement disappointed, hitting US markets.

The FTSE 100 was down 1.2% over the week by mid-session on Friday, with the more UK-focused FTSE 250 trading 1.9% lower.

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30 October Budget

Employers will bear the brunt of the £40bn in tax rises unveiled in Rachel Reeve’s Budget, the first by a Labour Chancellor of the Exchequer since 2010. She announced tax rises worth £40bn to fund the NHS and other public services. Office for Budget Responsibility (OBR) predicts the UK economy will grow by 1.1% this year, 2% next year, and 1.8% in 2026. Inflation is predicted to average 2.5% this year and 2.6% in 2015 before falling to 2.3% in 2026. The official definition of UK government debt was loosened by including a wider range of financial assets, such as future student loan repayments. Budget policies will increase UK borrowing by £19.6bn this year and by an average of £32.3bn over the next five years, according to the OBR. The measures introduced were roughly in line with market expectations, with some of the more controversial measures such as changes to pension tax relief or the ability to take a 25% tax-free cash lump sum from most pension pots not changed. Many of the changes mean that now it is more important than ever to ensure you have an appropriate financial plan in place to manage your affairs in the most tax-efficient way. More details can be found in the following articles, but if you want to discuss any of the changes and how they could impact you speak to your usual Charles Stanley representative.

• Autumn Budget review: Charles Stanley client update
• What does the Autumn Budget mean for UK businesses?
• Budget: market worries about borrowing emerge
• Macro implications of the Budget

Economics

The British Retail Consortium, an industry body, urged the Chancellor to take action to keep prices low as data revealed that shop price deflation accelerated in October. Prices at UK tills were 0.8% lower than 12 months ago, compared with a 0.6% year-on-year fall in September, according to the BRC/NielsenIQ Shop Price Index for October. This was the third straight month of annual deflation and the lowest rate of change since August 2021.

UK mortgage approvals rose more than expected in September, reaching the highest level in more than two years as falling interest rates boosted housing demand. Net mortgage approvals for house purchases rose to 65,600 in September, the highest level since August 2022, when they were 72,000, according to data published by the Bank of England on Tuesday. The figure was slightly ahead of consensus expectations of 65,000.

The US economy grew solidly in the three months to September, expanding at an annual rate of 2.8%. Despite there being a slight slowdown from the prior quarter's 3% rate, the figures released by the Commerce Department showed the US is on track for one of the strongest economic performances of any major economy this year. Consumer spending was the biggest driver, picking up from earlier in the year.

Eurozone inflation met the European Central Bank's target level of 2% in October after rebounding strongly from its lowest rate in three years in the previous month. According to data from Eurostat, the harmonised index of consumer prices rose at a year-on-year pace of 2.0% this month, up from 1.7% in September, the lowest reading since April 2021. The market had widely expected price growth to accelerate to 1.9%.

The number of China’s US-dollar billionaires has fallen by more than a third in the past three years, according to a “rich list” compiled by research group Hurun. This is a result of government crackdowns, weakness in parts of the economy and depressed equity markets. Since hitting a peak of 1,185 in 2021, Hurun said the number of US-dollar billionaires had been reduced to 753, with the 36% decline exceeding a 10% fall in the renminbi’s value against the dollar over the same period.

Geopolitics

Oil markets were volatile as events in the Middle East prompted concern even though overall oil supply is expected to be more than sufficient as the global economy slows. Lebanon’s Hezbollah appointed former deputy leader Naim Qassem as its new chief. Veteran leader Hassan Nasrallah was killed last month in an Israeli air strike on one of the militant group’s compounds in southern Beirut.

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Companies

Shares in HSBC rose after it reported a rise in pre-tax profits for the third quarter to $8.5bn, up from $7.7bn a year earlier. The figure was ahead of analysts’ expectations of $7.6bn. Oil prices fell by more than 17% in the third quarter amid concerns about the outlook for global oil demand. The figures were released a few days after HSBC's new boss announced a major overhaul of the company. The bank will be divided geographically into eastern and western markets amid increasing geopolitical tensions and a need to cut costs. HSBC's new chief executive, Georges Elhedery, said that implementation of the plans will "begin immediately" and promised to share more details alongside the bank's full-year results in February.

Pharmaceutical giant GSK has reported a drop in third-quarter profit due to charges related to Zantac lawsuits, as management reiterated its annual guidance and said its core outlook remained unchanged. Operating profit fell by 86 per cent, and earnings per share slumped due to a settlement charge of £1.8bn related to the Zantac lawsuits. The lawsuits arose after recipients of GSK’s heartburn drug Zantac claimed it caused cancer. Chief executive Emma Walmsey said the move to settle around 80,000 lawsuits across the US – covering about 93 per cent of the claims – was “to remove uncertainty… so we can focus forward.” Vaccine sales were unexpectedly weak, but there was a solid performance from the General Medicine business.

Microsoft reported double-digit gains in its latest quarter revenue and profit driven by strong demand for cloud computing, but its shares slipped after it warned that growth was cooling despite artificial intelligence-related spending continuing to rise. Investment in its infrastructure also means that capital expenditure almost doubled to $20bn from the same period a year ago. Revenue for its first quarter rose 16% annually to $65.6bn, beating analysts’ expectations of $64.5bn. Net income increased 11% to $24.7bn in the three months to the end of September, exceeding the average estimate of $23.1bn.

Apple reported strong sales of its iPhone 16 in its fourth quarter results that beat Wall Street revenue expectations. However, net income slumped after the company also said it paid $10.2bn in back taxes to Ireland following a European court decision. The company reported $94.9bn in revenue, up 6% year-over-year, but sales in China were weak. Apple Intelligence, the AI system for iPhones and Macs, started to roll out to customers in the last week of October as part of the iOS 18.1 update. However, its first-quarter guidance of low-to-mid-single-digit sales growth for the current quarter disappointed.

Amazon beat expectations in the third quarter with a surge in profits, boosted by a sharp rise in its cloud and online advertising business. Amazon, which reported net income of $15.3bn in the quarter to the end of September was up from $9.9bn in the equivalent period of last year, said that sales in its cloud business – Amazon Web Services – division rose 19% to $27.5bn, in line with Wall Street estimates. Its online advertising business improved 19% from the comparable quarter a year ago. Management’s guidance for the fourth quarter was ahead of market expectations.

Alphabet, parent of Google and YouTube, saw a third straight period of better-than-expected results in the third quarter. The technology giant had largely exceeded analyst expectations for the previous two quarters, and its latest results showed growth in both digital advertising and demand for Google Cloud. Technology leadership and Google’s AI portfolio is helping the company attract new customers, win larger deals, and drive 30% deeper product adoption with existing customers.

Standard Chartered lifted its full-year guidance after a record performance in its wealth division helped third-quarter profits beat expectations. The Asia-focused bank, which is headquartered in the UK, said operating income rose 11%, or 12% on a constant currency basis, to $4.9bn in the three months to the end of September.

Clothing retailer Next upgraded annual earnings guidance yet again in October, after a cold snap caused sales to surge. Updating on trading, the blue-chip retailer said full price sales surged 7.6% in the 13 weeks to 26 October, well ahead of the 5% uplift it had forecast. It now expects 2024/25 sales to come in at £5.02bn, compared to its previous guidance of £4.98bn, with pre-tax profits topping £1bn, at £1.005bn. That would represent a 9.5% year-on-year increase.

BP’s third-quarter results were the weakest since the fourth quarter of 2020, when industry profits cratered during the coronavirus pandemic. However, this was expected – and profits came in ahead of market expectations. BP management maintained its dividend at 8 cents per share after raising it in the second quarter and said it would keep the rate of its share buyback program unchanged at $1.75bn over the next three months.

Shell also posted a dip in third-quarter profits, weighed down by lower oil prices. However, the decline was less steep than feared and profits came in ahead of analysts’ expectations. Management said that the hit from weak oil prices had been partly offset by higher integrated gas volumes as well as favourable tax movements. The company also confirmed it would return a further $3.5bn to shareholders during the current quarter.

Shares in Melrose Industries surged after it released a document explaining the accounting around its 19 Risk and Revenue Sharing Partnerships (RRSPs) and said the portfolio was "well positioned" to generate significant returns for investors in the coming decades. In the 40-page booklet, the aerospace engineer said RRSPs are an important part of its investment case. Melrose said that its Engines division is "a world leader" in the design and manufacture of structural engine technology, with RRSPs forming part of the business.

Shares in Smith & Nephew tumbled, after the medical-devices maker issued a profit warning following weaker-than-expected sales in China in the third quarter. Smith & Nephew therefore now expects full-year revenue growth of around 4.5%, down from previous guidance of between 5% and 6%.

Educational publisher Pearson reiterated its full-year guidance after its latest results show an improvement. Sales rose 4% in the third quarter and are up by 2% in the year to date. Underlying sales growth, which strips out businesses under strategic review, was 5% and 3% respectively over the two periods. Driving the uplift was a 6% jump in sales in Pearson’s core assessment and qualifications division. Omar Abbosh, chief executive, said the company was accelerating AI capabilities across the business, and was already starting to see a commercial benefit of the technology.

Chinese electric vehicle giant BYD has seen its quarterly revenues soar, leapfrogging those of Elon Musk’s Tesla for the first time. It posted more than 200bn yuan ($28.2bn) in revenues between July and September. This is a 24% jump from the same period last year, and more than Tesla’s quarterly revenue of $25.2bn. However, Tesla still sold more units than BYD in the third quarter.

US travel website operator Booking saw an improvement in sales trends leading to better-than-expected gross bookings, revenue, and earnings. Room Nights, Rental Car Days and Airline Tickets all beat expectations in the quarter, showing a sequential acceleration in annual growth rates. Gross bookings exceeded the high end of guidance due to strong room night growth, lower foreign currency headwinds and stronger flight ticket growth. Management’s focus on driving cost efficiency appears to be working.

Glencore reported a mixed production performance for the first three quarters of the year on Wednesday, with copper, cobalt, zinc, and nickel output generally lower year-on-year, while steelmaking and coal saw a significant increase. Nevertheless, management maintained its full-year guidance to the City.