Autumn Budget: fiscal headroom key to gilt market reaction

5 Things to Know in Markets Today

1.Budget: No drama, some fiction but fiscal headroom key to gilt market reaction

The key focus for the markets will be the fiscal headroom. The rise in bond yields has probably halved the £24bn headroom inherited by Healey, but there is runway for a positive surprise without significant tax hikes because of wages and productivity growth that the OBR figures should better reflect this time. The market will judge his first Budget outing on how good a repair job he does. The risk is that by setting such a low bar for this budget there is a low bar to mis-step. The 10yr gilt yields trades a couple of bps higher this morning at 5.366%, close to the 2007 highs hit recently, though the UK has stood out recently as being the only G7 nation carrying out fiscal consolidation.

It seems clear that everything is pointing towards an early election in 2027. This explains why the Budget this year is looking so toned-down relative to Labour’s big ambitions. Anything other than a ‘steady-as-she-goes’ event would be a surprise and arguably this means there is a low bar for an unfavourable market reaction. But a good reaction will help reduce the UK’s ‘moron premium’.

I think the fiscal position may be better than indicated by reports that have been focused on higher bond yields, with wage growth and productivity gains (the ‘secret sauce’) to unlock billions in extra headroom. The OBR numbers are a crucial unknown at this stage.

A headroom figure below £15bn probably gets punished by bond markets by increasing UK fiscal risk premia. Close to or above the £24bn left by Reeves will see gilt yields down. Ie, if headroom drives a fiscal-credibility repricing, under £15bn would favour bear steepening—long yields rising more than short yields. A credible £24bn+ cushion would favour bull flattening, with long gilts outperforming. Look out for a hefty issuance cadence from the OBR as potentially offsetting a positive reaction initially on fiscal headroom numbers. Though extra borrowing for things like the Your First Home scheme can be financed by bills rather than primary gilt issuance, the market would be sensitive to how much this sort-of-sleight-of-hand is used by the Chancellor to make the figures stack up.

I had a look at some of the major things to look at in the Budget here. I expect some movement in banks and other financials, defence stocks and housebuilders later depending on what comes out.

This morning there are a couple more announcements on standing charges and a reversal of the cash ISA allowance reduction. I always thought it’s better to incentivise investing rather than discouraging saving.

2.European stock market struggle to extend rally

Yesterday, the FTSE 100 closed down three-quarters of a percent on HSBC weakness, against the broader rally across European equities, with the DAX +0.75% and CAC +0.5%. European stocks are broadly a touch weaker this morning with the FTSE 100 -0.2%, while the FTSE 250 is flat ahead of the Budget.

Sterling sold off for a fourth straight down day ahead of the Budget after failing to hold the break above the 50-day line at the 1.340 round number..looks to be more about a recovery in the USD’s fortunes than a pre-Budget verdict, but the pound will be sensitive to the Budget and the reaction in gilts.

3.AI rally builds after Anthropic IPO, SK Hynix earnings

Anthropic’s IPO filing continued to put a bid in the market for tech with semiconductors +3.9% (SOXX), still –15% from its recent high and –22% from the all-time high.  Nasdaq-100 rallied 1.3% back up the other side of the falling three method pattern, 50-day simple moving average offers key resistance at 29,800 with the index now –5% below ATH, =3% above the recent low. SPX rose +0.6% after opening up back above the 50-day SMA at 7,697, first time it’s held this since last Wednesday.

High beta and momentum tech names were firmed with space, quantum and necloud stocks all rallying sharply, with Nebius +11%.

And more of a lift this morning for the AI trade with the Kospi +6% after SK Hynix reported a seven-fold rise in third-quarter profit, also outlined $75bn in shareholder returns. Japan’s tech-heavy Nikkei 225 rallied 1.5%.

Coca-Cola rallied after hiking its full-year forecast for a third straight quarter despite some softness in US sales. The drinks company forecast earnings per share to grow at least 11%, from a prior forecast range of 9% to 10%.

Sellers remain in charge with Meta with the stock below both its 100-day moving average at $630.87 and its 200-day moving average at $632.33, a choke point that forms a key resistance area.

Boeing weighed on the Dow Jones sliding –10% on earnings miss with airline maker reporting Q3 Core EPS -$0.34 (est. -$0.21). Furthermore, FY26 deliveries guidance was cut, with 737 sales to below 500 (from 500), 787 to 90 (from 95-105). Management said to expect “stabilisation into early 2027”, but it won’t significantly ramp up 737 Max production until late 2027.

Memory chip maker Seagate reported after the close – record quarter but shares fell –3% as strong momentum with revenues +61% not good enough it seems to satisfy.

Oracle shares rose after it revealed it is adding OpenAI’s ChatGPT and Codex to its application stack, extending enterprise access to OpenAI tools. Google TPUs, OpenAI’s Jalapeno chip and Cerebras hardware will also run on Oracle Cloud Infrastructure. Cerebras shares shot up 8% though they can’t comment yet as it’s in a quiet period.

Megacap tech earnings are the focus later with Alphabet and Microsoft delivering very important numbers.

4.Standard Chartered profit surges, Unilever and GSK shares dip

Standard Chartered shares rallied 3% to the top of the FTSE 100 after reporting a big rise in pre-tax profits in the third quarter and raised its full-year growth and profitability targets. Pre-tax profit jumped 27% to $2.25bn, ahead of a consensus estimate for a 12% rise. Unilever shares meanwhile sank -2% despite upgrading its full-year guidance on another solid quarter driven by volume. Underlying sales rose +5.2. Management guided up at least 3% underlying volume growth for FY26 and underlying sales growth of around 5% in H2 alongside some margin gains. GSK was also punished despite good-looking numbers. The drug company reported a 4% increase in Q3 sales to £8.9bn, led by growth in its Specialty Medicines business. Nevertheless shares were down -4% as third-quarter total operating profit fell 16% largely on a £328mn restructuring charge. Sales outlook looks good though.

5.Fed set to hold as RBNZ surprises

The Federal Reserve is set to hold rates steady but could signal the path to more hikes. All eyes will be on chairman Warsh, who has the opportunity in the press conference to signal that recent inflation data reinforces the view from the September meeting that some further tightening will likely be warranted. The Cleveland Fed inflation nowcasting model indicates October CPI and PCE inflation metrics above 3.7% with core month-on-month readings for both in the 0.2-0.3% range.

The kiwi dropped more than 1% after the Reserve Bank of New Zealand narrowly voted to leave interest rates on hold, against expectations. Meanwhile there is a huge gap in the AUDNZD, which jumped 1.5% on diverging monetary policy outlooks in New Zealand and Australia after Australian inflation accelerated in September, with headline CPI rising to 4.3% year-on-year from 4.0% in August. The Bank of Canada is expected to raise rates later today.