Government Pivots and a Q4 Rally?


Government Pivots and a Q4 Rally?

Higher Band Tax Cut Reversed

October 3, 2022

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It's a new quarter, and hopefully time for the markets to turn around.

Q4 is typically the best time for European equities with about 4.3% average returns over the past 25 years. Extreme pessimism combined with reasonable valuations could prove an opportunity to claw back some losses according to Horizon Investments.

It is fair to say that a bounce is sorely needed. So far this year, European equities have been decimated to the tune of about £4 trillion. Long term valuations are looking more attractive than they have for a long time.

The Nikkei was one of the few risers in Asia overnight going against the grain after another poor finish in the US on Friday. Chinese markets are off for Golden Week, and South Korea also had a national holiday today.

European stocks have opened up lower, although damage was really done on Friday evening during the final hours of the session in America. Progress is likely to be slow over here until the US decide it’s time to start buying again.

Oil prices surged on reports that OPEC was considering a cut to output this week that might be as big as one million barrels per day, once again raising the spectre of a sustained rise in energy costs and an associated impact on inflation, just as oil had fallen to its lowest level since the beginning of the year.

The pound staged an impressive rally to start the week following news that the UK government would cancel plans to scrap the 45p tax rate, a week after sterling fell to its lowest-ever level against the dollar.

Kwasi Kwarteng has spoken to Tory MPs to try to reassure them his tax cuts can fix the economy. The chancellor is said to both recognize the scale of the unease and also remain confident he can convince them he's right. However, he did announce this morning that the removal of the higher tax band was a mistake and so has withdrawn that from his plans.

“It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our economy,” Finance Minister Kwasi Kwarteng said in a statement.

“As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.”

Truss said in a tweet Monday: “Our focus now is on building a high growth economy that funds world-class public services, boosts wages, and creates opportunities across the country.”

Personally I think this is a great decision. Kwasi will no doubt come under fire from the opposition and the press, but it’s the right call. As we wrote in our piece last week, the country was focusing on the least important part of the mini-budget because they were blinded by anger. Now we can appreciate the growth package that was designed to help.

Let’s hope for some good news soon and a better Q4, the markets could certainly do with it.

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