Gold glitters once more, as markets take UK Budget risks in their stride

A theme is emerging as we reach the last trading day of November, risk is back on. Global indices are a sea of green this week, after a bruising first half of the month. Although European and US indices are on track to record a loss for the entire month of November, the scene could be set for a rally in the final weeks of the year. Interestingly, the Philadelphia Semi-Conductor Index is higher in November, as Google’s shares surged by more than 20%, and other tech stocks also recovered. This sector has led financial markets since their low in April, so the fact that semi-conductors are rallying, along with broader market width, could stoke the anticipated ‘Santa rally’.  

The gold price is on track to record its fourth monthly gain and is higher by 3% so far this week. Silver is higher by 8%, as Fed rate cut bets ramp up. There is now an 82% of a rate cut from the Fed next month. This is sparking a rally in gold back above $4,000 per ounce, and the gold price is higher by $28 today. The silver price is higher by 1%. There are also gains for the oil price, as the Russia/ Ukraine peace plan remains on hold for the US’s Thanksgiving holiday.

Trading could be more volatile than usual today, as US markets open for half day and  liquidity is likely to be thin. Added to this, a disruption on the CME trading exchange, could also affect trading across FX, stocks, commodities and some bonds.

The problem is linked to a cooling issue at one of its data centers. This closure ultimately means that liquidity will be even thinner than usual on the Friday of Thanksgiving. If there is any sensitive market news flow or events, then moves could be exacerbated by liquidity issues, and there could be more volatility as a result.

So far, news flow has not been too disruptive to trade.  Donald Trump announced plans to dramatically tighten the US’s immigration system, which appears to be in response to the shooting of two National Guard members outside the White House, has not impacted market sentiment. The President’s post on Truth Social contained little detail, and so it is unlikely to be market moving.  

Pound is resilient to Budget fears

Interestingly, the pound is the third best performing currency in the G10 FX space this week. GBP/USD is back above $1.32, it made a high above $1.3260 on Thursday but has given back some of those gains this morning. Interestingly, the pound remains resilient in the face of Budget criticism.

The list of concerns around the UK Budget are stacking up, including fears that the UK is at a tax tipping point, where extra revenue raising measures won’t generate as much as estimated, 2, that taxation measures are too back-dated and potentially threaten the UK's expanded fiscal headroom, 3, that spending pledges are unfair, weighing on business and consumer confidence even more, and 4, that the UK government will need to rely on short-dated debt to raise finance, which could leave UK bonds at the mercy of short term debt markets.

Why are markets so sanguine about UK Budget?

Although UK bonds sold off on Thursday, moves were relatively small. In the past week, UK 10-year Gilts are lower by 8 bps and are outperforming US and European peers. Does the fact that financial markets seem to be welcoming this budget mean that we are missing something? We think that financial markets have been appeased by this Budget because of the focus on building fiscal headroom, and the fact that the fiscal forecasts from the OBR were not as bad as had been feared. However, the Budget is a political disaster for the Chancellor, with YouGov reporting that the public believe it is the second most unfair Budget since 2010, a close second to the mini-Budget in 2022. Economic data backs this up, the Lloyds Business Barometer fell sharply in November to 42. From 50. This suggests that business confidence in the UK remains subdued.

In the Eurozone, weak inflation from France and weaker than expected retail sales from Germany are weighing on the euro, which is at the lows of the day.