UK markets rebounded this week, with the FTSE 100 rising 0.9% to trade at 10,750 points at the time of writing.
Chancellor, John Healey delivered a relatively modest Budget on Wednesday, aimed at easing pressure on households and businesses, while maintaining confidence in the UK’s public finances. Measures included support for energy bills, changes to taxation and a new housing initiative, although the overall impact on the economy is expected to be limited.
The government announced £7.6bn of support for 2026-27, including £100 payments to around 20 million households in council tax bands A to D to help offset rising energy costs. Other measures include extending the fuel duty freeze and reducing VAT on electricity bills.
The £4.7bn Your First Home scheme is also intended to help 70,000 households onto the property ladder and support the construction of 20,000 new homes. These measures will be partly funded through higher taxes. The surcharge on bank profits will rise from 3% to 6% for a temporary period from January, raising almost £1bn next year. Taxes on income from property and savings will also increase by two percentage points from next April, on top of a previously announced 2% rise. By 2030-31, the Budget is expected to deliver £6.5bn in additional tax revenue, a relatively modest sum compared with the £66bn of tax increases announced in former chancellor Rachel Reeves’ first two budgets.
The Office for Budget Responsibility (OBR) has upgraded its forecast for UK economic growth in 2026 to 1.2%, but expects growth to slow to 1% in 2027, highlighting the fragility of the recovery. Meanwhile, the OBR has raised its inflation forecasts to 3.1% for 2026 and 3.4% for 2027, reflecting the impact of higher energy prices amid geopolitical tensions. This could complicate the Bank of England’s efforts to bring inflation back towards its 2% target.
The Chancellor also faces pressure from higher government borrowing costs, which the OBR estimates have reduced the public finances’ headroom by £14bn this year. His decision to absorb this deterioration rather than introduce more substantial tax increases or spending cuts suggests a continued emphasis on fiscal stability. However, difficult decisions on welfare and defence spending have largely been deferred until next year. Overall, the Budget provides some short-term support for households but offers little to fundamentally change the UK’s economic outlook.
Commodity markets
In commodity markets, Brent crude futures traded around $113 per barrel on Friday, and are set for a weekly fall, as prospects of renewed peace negotiations eased fears of supply disruptions stemming from escalating tensions in the Middle East. The pullback followed reports that US Vice President JD Vance had reached out to Iranian Security Council chief, Mohsen Rezaei in an attempt to restart peace negotiations, according to the Wall Street Journal.
Qatari mediators have also reportedly put forward a fresh proposal aimed at ending the conflict involving Iran, the US and Israel. However, a senior Iranian official rejected the proposals as unacceptable, suggesting significant hurdles remain to securing a diplomatic breakthrough. Iran’s foreign minister said that Tehran remained open to diplomatic efforts, raising the possibility of accelerating a proposed seven-day peace plan if an agreement is reached. Still, investors are also weighing concerns over the prospect of Houthi attacks and the possibility of US military action against Iran following the November 3 midterm elections. The persistent threat of supply disruptions has kept crude prices elevated, adding to inflationary pressures and complicating the outlook for global monetary policy.
Gold traded around $3,980 per ounce on Friday and is set to end the week lower, as data showing elevated US inflation and resilient economic growth reinforced expectations of a Federal Reserve interest rate hike later this year, reducing the appeal of the non-yielding metal.
Equity markets
US equity futures fell on Friday as disappointing earnings from major technology companies dampened market sentiment. In Thursday’s regular session, the Dow Jones Industrial Average fell 0.25%, the S&P 500 lost 0.30% and the Nasdaq Composite declined 1.38%. The US economy expanded at an annualised rate of 3.4% in the third quarter, beating Wall Street expectations, as companies invested heavily in artificial intelligence and American consumers continued to spend despite high prices.
The strong GDP figure from the Bureau of Economic Analysis marked an acceleration from the 2.2% growth rate in the second quarter and was ahead of the 3.2% forecast in a Bloomberg poll of analysts. AI spending led the gains, with private fixed investment jumping 9.4% during the quarter, its biggest rise since the post-Covid rebound in 2020, as technology groups raced to build data centres and snap up high-tech equipment. Consumer spending rose 3.8%, the same pace as the previous period, even as a wave of inflation washed across the economy and a boost from tax refunds faded. Government spending increased, largely reflecting a wind-down of oil sales from the Strategic Petroleum Reserve. Oil sales are deducted from government expenditures, so a lower number is reflected as higher spending. A drop-off in net exports acted as a drag on growth as companies ratcheted up imports of tech equipment. Imports are treated as a negative in GDP calculations.
The report suggests the world’s biggest economy remains in robust health as spending continues to accelerate even as inflation bites. The Iran war has pushed up fuel costs that have fed through to other areas of the economy, while the AI construction boom has also pushed up costs. Fresh inflation figures released on Thursday showed the Personal Consumption Expenditures index, the Federal Reserve’s preferred gauge of inflation, rising to an annual rate of 3.6% in September, up from 3.4% previously.
Less affluent Americans have been squeezed by higher prices. However, the data showed that overall, American consumers continued to splash out in the third quarter, with spending on healthcare, food and accommodation rising. The Federal Reserve kept interest rates unchanged at its latest meeting this week, days before the midterm elections, despite the surge in fuel prices sparked by the Iran war reverberating across the US economy. The Federal Open Market Committee held rates in a 3.75% to 4% range following a 10-to-two vote, with Governor, Lisa Cook and Cleveland Fed President, Beth Hammack favouring a quarter-point rise. Rate-setters said on Wednesday that the accumulation of more information will help the committee determine the policy stance appropriate to ensure a timely return of inflation to the committee’s 2% goal.
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