London's financial markets experienced a significant downturn, driven by political uncertainty surrounding the upcoming Labour Budget and growing fears of a technology bubble on Wall Street.
Budget U-Turn Sends Shockwaves Through Markets
The Labour government has dramatically reversed its position on a manifesto-breaking income tax hike following continuous weeks of media speculation. This policy reversal came after rogue Westminster briefings created ripples through financial markets, with the government ultimately rowing back on the proposed tax increase.
Political pushback combined with a better-than-expected forecast from the fiscal watchdog were cited as the primary reasons for the U-turn. However, many economists remain unconvinced by the latter explanation. While the projected black hole has reduced from £30bn-£40bn to approximately £20bn, this still represents a substantial sum that could necessitate significant tax rises, according to warnings from financial experts.
Market Reaction and Economic Indicators
The market unease manifested in several key indicators. 10-year gilt yields climbed by 13 basis points to reach 4.57 per cent at the start of trading, marking the largest jump since July when traders were alarmed by Rachel Reeves' emotional appearance in the House of Commons.
Meanwhile, the FTSE 100 fell by 1.11 per cent to 9,698.37 points, dashing hopes that the blue-chip index might soon cross the psychologically important 10,000 mark. The decline wasn't solely attributed to Budget jitters, even as Lloyds Bank – often viewed as an informal barometer for the UK economy due to its domestic focus – fell by 2.7 per cent.
AI Bubble Concerns Compound Market Woes
Concerns about an emerging AI bubble contributed to the negative sentiment, with steep losses in tech giants on Wall Street adding to the pressure on London markets. Richard Hunter, head of markets at Interactive Investor, described the session as a "bruising" one that indicated "the investor narrative is changing."
The combination of domestic political uncertainty and international technology sector volatility created what market analysts termed a "perfect combination" of fears, resulting in significant share price falls for major UK banks including Lloyds and Natwest.
Other notable developments from the trading session included the High Court finding BHP liable for Brazil's worst environmental disaster and Redbird pulling out of its deal for The Telegraph.
