UK bank stocks take a hammering from Reeves, as we wait for key US data

European stocks have opened lower today and US stock futures are also pointing to a lower open as we wait for the Fed’s preferred measure of inflation to be released later on Friday.

UK banks get hit by windfall tax expectations

The decline in UK shares are led by the banks, which are all weighing on the FTSE 100 as rumours swirl of yet another tax rise, this time a windfall tax on lenders. Financials are down 1% on Friday, led by a 3% drop for NatWest, a 2.5% drop in Lloyds and a 2% fall for Barclays. The drip feed of potential tax rises to be included in this budget have dominated the papers this month, however, so far, the FTSE 100 has been resilient to this. However, now that it seems Rachel Reeves is going after the FTSE 100’s big hitters like banks, this could weigh on the index as we lead up to the Autumn budget.

US stocks outperformed their European peers in August, with the S&P 500 rising by 2%, compared to a 0.8% gain for the FTSE 100. This gap could widen, especially if we get the expected interest rate cuts from the Federal Reserve this year, at the same time as the UK government seems focused on squeezing businesses and consumers with multiple tax increases later this year, which is eroding confidence and dimming UK growth prospects further.

Political woes weigh on the dollar

Political woes are also weighing on the US dollar, which is the second weakest performer in the G10 this month. Interestingly the pound is one of the top performers this month, however, it has weakened sharply this week and is the second worst performer on the G10, as the reality of Autumn’s budget starts to hit the FX market. Numerous UK business figures have come out against the UK’s economic policy this week, saying that it undermines growth and makes the cost-of-living crisis worse. When your own business leaders are questioning the government’s policy, it is no wonder the pound is falling sharply.

The dollar has been undermined by the sharp drop in Treasury yields in recent weeks, and the heating up in the spat between Donald Trump and Federal Reserve member Lisa Cook is not helping sentiment towards the dollar. Cook is suing President Trump for attempting to fire her, which her lawyer says is illegal, even if she did commit mortgage fraud earlier this decade, something she denies. President Trump has ramped up pressure on the Fed to cut interest rates this year and is now actively trying to replace members with his own picks. So far, Trump is doing this through ‘legal’ means, but it does lead to important questions about the future of Fed independence and the management of the economy. Any development in the Cook/ Trump law case in the coming days could have big ramifications for the US dollar, and it worth watching this story closely. In this environment, it is no wonder that gold is back above $3,400 per ounce, and the market is waiting to see if it can make another stab at the record high of $3,500, even if the price of the yellow metal is slipping a little on Friday.

PCE watch

The Fed’s preferred inflation measure is released today for July. The Core PCE reading is expected to rise a notch to 2.9% from 2.8% in June. If this inflation gauge does not move above 3%, then the market will probably continue to price in 2 rate cuts for the rest of this year with an even chance of a third cut, which could support equities as we move into September.  

Overall, it looks like the stock market rally is on pause, the FSTE 100 is extending losses this week, and if it closes lower today, it will be the longest losing streak since April, and would put the UK index as a global outlier, with gains this week for the S&P 500, and milder losses for the Eurostoxx 600 index.