Pre Budget Giveaway From the Chancellor
Another day, another pre-budget giveaway from the chancellor: He’s pledged £6bn to the NHS to cut through the waiting lists in the system and get the service “back on track”. Expenditure is split £3.8bn on diagnostic services and local surgical hubs, which will mean more can be done outside of a major hospital. Another £2.1bn is going on technology, in a bid to “digitise” the NHS and make it more efficient. The previous big attempt to overhaul NHS It was early last decade and ran massively overbudget and didn’t really do the job, effectively wasting £10bn of taxpayers’ money. There have since been improvements on the system, but the government will be keen to do all they can to streamline the systems and processes, particularly as they’re about to sink a further £12.5bn a year into it through the health and social care levy which gets tacked onto National Insurance from next April.

 

Capital Gains Tax
The budget itself is on Wednesday and now that most of the spending is out of the way, the less fun part of how he’s going to pay for it comes into focus: Capital gains tax could be brought into line with income tax, whilst student loan repayments are likely to be subject to a lower threshold, meaning more people paying them back more quickly. There’s an outside chance that Mr Sunak will also look to cut tax reliefs on pension contributions by higher rate taxpayers, but this is a risky gambit, with it hitting their voter base directly and also might mean that less is saved which in turn hurts the exchequer in years to come – not that we’d expect them to be thinking too far ahead. This budget is always going to be a tricky one, with debt service costs being hit by rising inflation and imminent interest rate hikes meaning a spend of between £50bn and £75bn over the next five years just in extra interest payments.

 

Northern Ireland Protocol
Talks with the EU over the Northern Ireland Protocol have been constructive, according to diplomats, and with talks set to resume on Tuesday it might be the case that we get some kind of agreement in principle sooner rather than later. The UK are leaning towards a “Swiss style” deal by where there’s a court of arbitration set up to manage any disputes, though the European Court of Justice would still sit above that. The balancing act will be ensuring that the ECJ is far enough away that the UK can claim a victory, but still ultimately in control so that the EU doesn’t break its red lines on the court having to have the final word.

EU and Poland
Going less smoothly are relations between the EU and member state Poland: The dispute between the two has grown from Poland making changes to its constitutional court, which effectively removed its political independence. Thereafter the EU has threatened to withhold funds to Poland and the Polish Constitutional Tribunal concluded that their own national constitution has primacy over EU law. The dispute is leading to conversations around a possible “polexit” but in reality, we’re a very long way from that and even if the majority of the EU did want them out, it would take a unanimous vote and Hungary has got Poland’s back and vice-versa, when it comes to standing up to Europe.

In the FX Market…
Turkey’s lira is having all kinds of issues, falling to its lowest level on record after President Erdogan announced the expulsion of the ambassadors of the US and nine other western countries. The move was in response to a joint letter from the embassies calling for the release of jailed businessman and philanthropist Osman Kavala but is also being cited as a bid to distract attention from the current economic woes the country is facing. Last week the Turkish bank slashed interest rates by 2%, despite inflation in the country being around 20%. Understandably the market took a dim view of this move and the souring of relations with the west further compounds the concern that the situation is going from bad to worse. With the currency in freefall and interest rates not an option for the central bank, selling FX reserves is the only tool they’ve got to try and stem the flow, though this is a finite resource and one that any central bank would be reluctant to do. This is one to watch.

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Oil
The oil market is wrestling with conflicting forces at the moment: Prices are continuing to rise on strong demand, whilst OPEC are resisting calls to open up the taps, citing concerns over China’s economic resilience. Concerns are being raised over growth downgrades by major banks and also China themselves saying that outbreaks of the delta covid variant are expected to worsen in the coming days. The price of a barrel is as high as it’s been since 2014 and though we’re now at the top of most banks’ estimates over where the price could go, there is still 30% less oil and gas drilling rigs online now compared to the start of the pandemic.

This Week
This week is a big corporate earnings week, and it has begun with HSBC beating expectations with a 75% jump in third quarter profits versus las year, predominantly because their bad loan provisions weren’t needed, and they’ve been able to move them off the balance sheet. The bank will also undertake a $2bn share buyback with some of its profits. We’ve got Facebook announcing later today, but as good as their financial results could be, they’re also going to be facing another PR battering when whistleblower Frances Haugen by the joint committee in Westminster later today – Nick Clegg has already circulated a memo to staff bracing them for the impact! The economic calendar is also fairly full, with highlights being European GDP, US inflation and central bank policy announcements from the ECB and Bank of Canada – both expected to hold firm but as always, we look for signs of inflation induced strains.

 

Have a great week

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