Financial Times

[Blakesley]

“The Financial Times is read by people who own the country”

A broadsheet focussing on business and economic matters. As such they are vaguely centre-right and liberal, but are firmly pro-European. Endorsed the Conservatives since 2010, but Labour from 1992 to 2005 due in part to Tory Euroscepticism in that period, and supported Remain in the referendum.

Circulation: c. 190,000 per month

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Pound steady as gilt yields rise following election result

The pound experienced a brief decline and recovery as the results of the election revealed a hung Parliament in which Labour is the largest party. After dropping to $1.2735 in the mid-morning, the pound recovered to 1.2865 by the early evening.

"We're witnessing diverging tensions on sterling," said Henry Burgess, chief investment officer at Columbia Threadneedle Investments. "On the one hand, Labour's spending plans and economic plans are certainly placing downward pressure on the pound. On the other, the likelihood of a hard Brexit is virtually nonexistent now, which markets are reacting favourably to and could see structural support for sterling down the line."

Nevertheless, the pound remains under pressure as political uncertainty grips Westminster. "The soft Brexit benefit is going to be priced in rapidly," said Burgess. "The real determinant after that is going to be what the government does."

Equity markets diverged in post election trading. The FTSE 100, dominated by blue-chip firms, dropped roughly 1.3% in Friday's trading, whereas the more UK-focused FTSE 250 increased in value by roughly 0.2%. "UK based firms are likely to see some benefit from Labour's spending plans, industrial policy, and most importantly Brexit policy," said Michael Illsley, a portfolio manager at JPMorgan Asset Management. "There's going to be some volatility as the exact terms of Labour gaining power are sorted out, but that's the 10,000 foot view at present."

Gilt yields inched up over the course of the day as Labour was declared the largest party. Prices for government bonds were noticeably higher with the 10-year gilt yield rising 9 basis points to 1.12 per cent. Upward pressure is expected to continue. "Markets were not expecting a Labour victory and the gilt markets are reflecting that as they adjust to expected levels of spending under a Labour government," said Justin Gallo, a public economics lecturer at the London School of Economics. "Savvy gilt traders also know that confidence agreements, which are necessary in a hung Parliament, are expensive - which could raise the cost of government borrowing more."

Rising gilt yields increase the cost of government borrowing over the long term. "There's a cost to spending if it's not done in a measured way," said Gallo. "We'll see if the next few years bring measured changes in spending plans."

"Markets are unsure what to think of this," said Nicholas Yu, head of UK investments at Goldman Sachs. "On one hand, there are a lot of positives regarding Brexit, on the other there are projected negatives, and a number of plain old unknowns. It's just creating more confusion, which is exactly what the UK economy doesn't need."

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BoE rate-setters agree to interest rate rise in closely divided vote

The Bank of England raised interest rates for the first time in six years following a surprise vote of the Bank's Monetary Policy Committee. It is thought that the likely change in the Government's position on Brexit led Bank policymakers to agree to the rate increase in a 5-3 vote.

Projections released by the Bank showed inflation, already nearing 3%, remaining elevated above the Bank's 2% statutory target over the next three years. Rising inflation, combined with stagnant wage growth, placed a squeeze on consumers that is "likely to be persistent, if not intensify" said the Bank. Sterling increased while equities fell following the announcement of the Bank's more hawkish stance.

The Bank's decision comes in the wake of a raft of poor economic data. Retail sales figures, announced a day prior, showed the slowest growth in recent years, while business confidence remained low. Also confounding the decision were weaker wage growth and weakening industrial production, which lead to an estimate of 0.2% growth in the second quarter.

"We have to anticipate shifts in the economy," said outgoing MPC member Kristen Forbes. "A closer relationship with Europe, likely increased pressure on the public finances, these are all things that weigh on our inflation estimates and decisions on interest rates. There are enough signs of economic activity to justify this policy shift." Forbes also pointed to the US Federal Reserve reaching a similar conclusion and saying that rate decisions were "a global phenomenon".

However, the move was not without controversy. Samuel Beck of Oxford Economics described inflation as "a temporary problem" which will resolve with "a slowdown in growth projections". Others pointed to weakened consumer demand and low savings rates, saying that few would be able to maintain spending in light of the shocks that come with increased interest rates.

Deirdre Hill of Barclays Capital said that the UK could boost growth and potentially wages by remaining aligned with the single market. "There are likely political tradeoffs, but it's government's job to make those," said Hill. "The economic reality is that an announcement that the UK will maintain single market membership would increase growth in such a way that the Bank's decision would appear more justified."

"One thing is clear: this is a wake-up call for markets," said Will Amey of Pimco.

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Gilt markets respond positively to Brexit white paper

Yields on long-term gilts edged lower following the publication of a well received white paper on the government's negotiating aims regarding the United Kingdom's exit from the European Union.

Nicholas Yu, head of UK investments at Goldman Sachs, said that the government's white paper indicated "a more practical view of Brexit that is likely to achieve a more economically favourable deal." He added that, "looking at long-term trendlines, gilt markets can see a long-term case for stability of government debt vis-a-vis the economy with the negotiating framework put forward by the government."

FTSE 250 shares rallied higher following the white paper's announcement, with traders highlighting the benefits of a closer relationship with the EU for British businesses. "The language before was 'out, out, out' and 'hard Brexit', now we're seeing a government that actually thinks through the ramifications of what they're proposing," commented Michael Illsley, a portfolio manager at JPMorgan Asset Management.

The white paper shows the seriousness that the government is approaching Brexit negotiations with, said a Labour MP on the backbenches. "This is not some unicorn proposal that the Conservatives are putting forward, this is a path to an achievable, equitable Brexit. Conservative MPs were quick to criticise the deal for being short on detail, such as whether the government was considering membership in the Single Market or Customs Union.

Sources in European capitals are reportedly pleased with the government's white paper, which represents a "less confrontational, more practical approach to ensuring a mutually beneficial, if sadly divergent, future" according to one source. A senior European Commission source familiar with Brexit discussions characterised the paper as having "lovely aims", but noted a fuller discussion of trade-offs would need to take place before an agreement is reached.

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Conservatives outline plans to increase investment, postpone tax cuts

Speaking in Peterborough, Conservative leader Dylan Macmillan announced that "paying down the deficit" as a cornerstone of the United Kingdom's economic policy. Making the case that "strong public services can only exist with strong public finances", Mr Macmillan lambasted Labour's tax and spending plans.

In his speech, Mr Macmillan announced that the Conservatives would "prioritise investment in key public services". Notably, Macmillan's speech eschewed mention of plans to cut taxes or, more notably, raise the personal allowance to £15,000 - a commitment he made in his leadership campaign. The speech also saw the return of former chancellor and prime minister Gordon Brown's golden rule: that borrowing would only be used to fund investment.

The commitment was seen as a significant shift from austerity by Mr Macmillan, as well as a fundamental shift in Conservative orthodoxy on the public finances. "It probably meets the country where they are on spending, but not the Conservative base," said a researcher with Opinium.

Sources close to shadow chancellor James Manning previewed Conservative spending plans, indicating that Manning has committed to “significant” real-terms spending increases for education, health, law & order and defence. Additionally, the shadow chancellor is previewing an "infrastructure levy" in the form of a 1% rate increase on the additional rate of national insurance to fund the infrastructure pledges that Mr Macmillan make in his Peterborough speech.

Asked whether he would rule out tax increases to fund increased spending, sources close to Mr Manning refused to do so. Manning is said to be “grappling with getting the balance right,” but “abundantly clear” that any new spending pledges will be paid for by taxation and that “the current budget deficit will fall dramatically under our plan from year one.”

Institute for Fiscal Studies director Paul Johnson said it was "nearly inevitable" that a commitment to reduce the current deficit, put up structural public spending, and increase the personal allowance to the levels Macmillan and Manning are proposing would lead to increases elsewhere. Mr Manning is reportedly committed to the £15,000 personal allowance.

It is understood that Conservative MPs have been told by the shadow chancellor that tax cuts under his fiscal plans will be “slower than we might like,” and - initially, at least - “take a back seat to pro-growth policies.” One source on the right of the Conservative Party informs us that this is not the case and that plans for tax hikes and a slow down in tax cuts come as are "insane".