Structurally We Hold Our Bearish View Against UK Gilts and Sterling

Markets

The battle might be won, but the war definitely ain’t over. The corner stone of UK Chancellor Reeves’ Autumn Budget are £26bn of back-loaded tax rises (eg freezing income tax thresholds from 2028-29) which lift her fiscal buffer from £9.9bn to £22bn and help pay for higher welfare spending. Reeves avoids breaking her self-imposed rule that day-to-day public spending has to be covered by tax revenues by 2030. The Budget is a flurry of small measures, but lacks the big promised reforms to boost UK productivity/competitiveness and/or sustainably improve public finances. The Office for Budget Responsibility scaled back average growth from 1.8% to 1.5%. The public deficit is forecast on a declining path from 5.1% of GDP last year via 4.5% this year to 1.9% by 2029/2030. Debt as a share of GDP is seen at 95% this year and holding at 96% at the end of the decade. It’s clear that it won’t take a lot to derail the still precarious situation. UK markets traded initially volatile, partly because of the unwanted mismatch of OBR forecasts and Chancellor Reeves’ address, but in the end a fresh sell-off in UK assets was avoided. It suggests some more room for recovery in the very short run. Structurally we hold our bearish view against UK Gilts and sterling. In a daily perspective, UK yield curve bull flattened with yields ending 2.8 bps (2-yr) to 11.5 bps (30-yr) lower. Short-term (inflation-dampening) political incentives to safeguard UK households purchasing power might also help tipping the balance towards a slightly more dovish Bank of England in coming months. EUR/GBP closed at 0.8750 from a start around 0.8790.

US markets are closed today for Thanksgiving holiday with traded volumes expected to remain low tomorrow (Black Friday) with an early (US) close. The EMU eco calendar contains EC sentiment data and Minutes of the previous ECB meeting, but those won’t have a profound market impact. The risk rebound which started last Friday became technically relevant yesterday by taking out last week’s high and stemming fears of a potential sell-on-upticks pattern. The recent outperformance of US Treasuries and buoyant sentiment helped EUR/USD back towards 1.16. On a geopolitical level, any comments/developments in US-brokered peace talks between Ukraine and Russia remain a wildcard for trading.

News & Views

The Hungarian GKI Sentiment index showed a mild adjustment this month after three consecutive months of increases. Business expectations changed marginally (from -9.3 to -9.9). Consumers adapted somewhat more downbeat views with the index easing from -25.6 to -27.2. The Composite GKI sentiment index, summarizing these expectations, declined from -13.5 to -14.4, which GKI assesses as a shift within the margin of error. The retreat in business confidence was driven solely by industry (-2). The construction index was unchanged, while the retail and services indicators each rose (+2). The retail indicator has not stood this high for fourteen months, nor the services indicator for thirteen. Looking ahead, construction remains the least, and business services the most optimistic. Firms willingness to hire rose to the highest in a year. The price indictor tracking firms’ expected sales prices over the next three months rose slightly after three months of stagnation. GKI consumer confidence eased from a 14-month high Households’ assessment of their financial situation deteriorated noticeably, and their financial outlook worsened slightly. Changes in indices on the economic outlook, on major purchases or inflation didn’t change much. Prospects on future unemployment improved markedly.

The Bank of Korea voted to keep the policy rate at 2.5% for the fourth consecutive meeting this morning. The BoK also changed its assessment on future policy as it now indicates that it will “decide whether and when to implement further rate cuts”, being less explicit on a rate cut bias compared to previous meeting (maintaining a rate cut stance). At the press conference governor Rhee admitted a divide within the MPC as three members preferred the option to keep rates unchanged while three others believe the possibility of a rate cut should remain open. The governor also sees current policy rate as close to a neutral level. The BoK in an updated forecast upwardly revised is 2026 growth forecast to 1.8% from 1.6%. Inflation next year now is expected at 2.1% (from 1.9%). Aside from financial stability concerns due to elevated property prices and high debt, the MPC also grows more concerned on the risk of a weak won raising inflation. The won gains marginally this morning (USD/KRW 1464.76), but holds near multi-year lows