This week in the markets: politics in focus

It’s all about politics this week and next, but investors are paying attention because elections in the US and Japan and the UK’s Budget could have implications for markets too.

Tax-rises ahead

The shape of the UK’s Budget this week is becoming clear. As expected, it’s going to be a tough pill to swallow, with up to £40bn of tax rises and spending cuts in prospect, together with another £20bn of extra borrowing to fund improvements to public services and productivity-enhancing infrastructure investment.

The headline-grabber will be an increase in employers’ National Insurance, which will raise £20bn by itself and (just about) allow the government to claim it has stuck to its pre-election promise not to increase ‘working people’s’ income tax, National Insurance and VAT.

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With critics pointing out that higher taxes for employers tend to be passed on in due course in the form of lower pay or fewer jobs, Labour’s adherence to its manifesto pledges is looking tenuous as the Budget approaches. Further grist to the sceptics’ mill will probably be provided by an extension to the freeze on income tax thresholds, which some view as a back-door tax rise.

One of the ways in which Chancellor Rachel Reeves plans to fund its proposed reboot of the UK economy is via a reshaping of the fiscal rules which cap the amount the government can borrow. Redefining the UK’s national debt, by offsetting the value of some government assets, could free up £50bn of new borrowing, although the Chancellor is expected to only use less than half of that new headroom. Bond investors are watching closely, with 2022’s unfunded tax cuts under Prime Minister Liz Truss fresh in the memory.

Another key change that will affect some investors is a likely increase in the top rate of capital gains tax to align with the higher rate charged on property disposals. But there will be relief that the government seems to have rowed back on expected changes to the taxation of pensions.

Across the pond

Over in the US, the main focus this week and next will be the too-close-to-call Presidential election, pitting vice-president Kamala Harris against former President Donald Trump. While the betting odds are pretty much evenly balanced, financial markets are starting to price in a return to the White House for Trump.

The so-called Trump trade is betting that higher import tariffs, lower immigration and tax cuts will all be inflationary if the former President is voted back in. That is showing up in higher bond yields, which have led to one of the worst months for the bond market in years. Yields and prices move in opposite directions and the income earned on a 10-year Treasury has risen by 0.4 percentage points to 4.2% as investors price in a slower than expected fall in US interest rates in the months ahead.

Key to bond investors is what happens in Congress. A clean sweep, in which the President finds support in a friendly House of Representatives and Senate, is key to pushing through controversial policy measures.

Japan gives the LDP a kicking

Meanwhile, in a lower profile but important election, Japan’s ruling Liberal Democrats lost their parliamentary majority in a snap election that badly misfired for new PM Shigeru Ishiba. He went to the country for a mandate to govern after he took over the leadership of the LDP. Instead, his party was punished for a political funding scandal that has angered voters suffering from a cost-of-living crisis as inflation rises after years of stagnant or falling prices.

The Japanese currency fell as investors priced in ongoing political uncertainty. But shares, which tend to like the boost to exporters of a lower yen, were up by 2% on the news.

In other markets

Meanwhile, there’s plenty going on in other stock and commodity markets. The tech-heavy Nasdaq index in America has hit a new all-time high, clawing back the 15% slide it experienced over the summer as investors have started to view the Magnificent Seven as an each-way bet. The likes of Apple, Amazon and Microsoft are seen as beneficiaries of a growing economy but also of the lower interest rates that a slowing economy might trigger. All three of these, plus Alphabet, are due to report results this week as the US’s third quarter earnings season gathers pace.

Gold also hit a new high last week of over $2,700 an ounce as investors warmed to its perceived safe haven status at a time of growing geo-political tensions, most notably in the Middle East where Israel launched a series of targeted strikes on Iran over the weekend. The fact that the oil price fell back after the strikes is an indication that the attack was carefully calibrated and avoided key energy targets.

• Gold price: the latest analysis and our fund picks

Our latest Autumn Budget analysis

• Autumn Budget: how Labour might change employers’ NI contributions
• Autumn Budget: how Labour might change pensions
• Autumn Budget: how Labour might change ISAs and the dividend tax

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