UK reshuffle fails to spook bond markets, as Revolut employees get their payday

There’s been a hard start for the Prime Minister in the UK, who has come back to work and hired and fired a number of aides to beef up his economic acumen as we lead up to the Autumn Budget. The Treasury secretary Darren Jones, essentially Rachel Reeves’s former number two, has been poached by Number 10, and the PM has also hired Baroness Shafik as an economic advisor.

There is a sense of urgency that the PM needs to address the country’s economic woes and the upcoming budget. This summer’s drip feed of potential tax rises has not gone over well with voters, and Labour has been hemorrhaging support to Reform in recent weeks. Essentially voters don’t want tax rises, while Labour backbenchers don’t want spending cuts, but something will have to give.

Could PM advisors keep hard left budget at bay?

It is unclear if Jones is a fan of more tax rises and no spending cuts, as his views have swayed in recent months. Likewise, Shafik, although extremely experienced as an economist, arrives at Downing Street in a wave of controversy after her dismal term as Chancellor of Columbia University in New York. However, at one point she was the Tory government’s preferred choice to replace Mark Carney in 2019. Thus, it is not clear that she would support a hard-left budget, which is why the bond market has been relatively stable on Monday.

Some see Number 10’s decision to boost its economic know-how as a way to undermine the Chancellor, who is deeply unpopular with the electorate, a new survey by YouGov reports today. The poll found that only 16% of all voters think that Rachel Reeves should keep her job, with 55% of respondents saying that she should be replaced by someone else, 41% of Labour voters also believe that she should be replaced.

Starmer needs to tread carefully around Reeves

Tensions between Chancellors and Prime Ministers are nothing new, think back to Gordon Brown and Tony Blair, but this time there could be market ramifications. Back in July, when Rachel Reeves was crying during PM questions and rumours swirled that she was about to be sacked, the bond market took fright, worried that a more left-leaning chancellor could take power. Back then bond yields surged, and the 10-year yield rose by 50bps in the ensuing days. However, after a dreadful August for UK bonds, the 10-year yield is well above July levels, and yields are higher by 20bps in the past month. It is also the worst performing bond market in Europe in the past 4 -weeks.  Thus, today’s rise in 10-year yields of 1.4 bps seems mild. Either the market has changed its view on Rachel Reeves and sees her as a liability for the UK’s finances, or the market does not believe that today’s appointments will lead to a new chancellor moving into number 11.

The mild rise in bond yields today is in line with gains in yields across Europe, so the UK does not look like an outlier. Likewise, the pound, which is sensitive to shifts in sentiment towards the bond market, is also relatively stable, and is the top 3 performer in the G10 FX space on Monday.

FTSE 100 gets a boost from defense

Thus, today’s news has been absorbed relatively well by financial markets. The FTSE 100 is also mildly higher, led by defense companies including Babcock International and Rolls Royce, BAE Systems is also a top 10 performer today after the announcement of a £10bn deal from Norway to buy frigates from BAE, which will be built in Glasgow. This is good news for the overall defense sector, which has been a pillar of support for the FTSE 100 this year, for example, BAE Systems is higher by 55% YTD, Rolls Royce is higher by 93% and Babcock is higher by 108%.

Today’s news suggests that Europe’s push to boost defense systems and beef up Nato spending, now that the US has scaled back its funding, will benefit UK firms, and potentially the UK economy. This is a much-needed piece of good news for the UK economy as we embark on a tough Autumn.

Revolut employees get antsy waiting for IPO

UK fin-tech giant, Revolut, is also grabbing the headlines, as it allows staff to sell their holdings in the private market with a valuation of $75bn, solidifying its position as the UK’s most valuable fin tech company. This could be a sign that the company will either 1, IPO soon, or 2, that its employees are getting antsy about the lack of an IPO and want to release their equity in the firm rather than wait for the IPO.  Whatever this moves signals, it is deep shame that Revolut is not planning to IPO in the UK.