A rally across retail shares and improvement in banking sector sentiment following the emergency budget helped the FTSE bounce off earlier lows this afternoon.
The Chancellor of the Exchequer George Osborne today unveiled large cuts in spending to bring the UK's public finances back in order. Overall spending will be cut by £30 billion a year, including £11 billion from welfare reform savings, while an increase in the standard rate of VAT to 20% on 4 January 2011 from 17.5% is expected to yield £13.5 billion a year by 2015. Mr Osborne also said that food and children's clothing will be exempt from VAT, immediately sparking a rally across UK retail shares, sending shares of Mothercare up by as much as 3.7% to 606.5p and Sainsbury up 1.1% to 332.9p.
Osborne also said there will be a two-year pay freeze for the public sector, except for workers earning less than £21,000. UK banks bounced back this afternoon following the announcement of the banking sector levy. Mr Osborne said he plans to tax bank balance sheets from next year – an effort that is meant to generate £2 billion for the government. The proposed levy, which will take effect on 1 January 2011, will initially be set at 0.04% before increasing to 0.07% and will apply to British banks as well as the subsidiaries and branches of overseas banks. According to the Treasury, banks will only be liable for the levy when their relevant aggregate liabilities exceed £20 billion. With most of the uncertainty out of the way, most UK banks were able to pare earlier losses, with Lloyds Banking Group rallying 3.9% to 58.9p and Royal Bank of Scotland climbing 0.7% to 47.09p. Meanwhile, Barclays, HSBC and Standard Chartered were marginally lower.
According to the Chancellor, capital gains tax will be increased to 28% for higher rate taxpayers but will remain at the 18% for standard rate taxpayers. The income tax personal allowance for under 65's will increase by £1,000 in cash terms, taking it from £6,475 in 2010/11 to £7,475 in 2011/12, while the government said it will reduce the basic limit for tax by £2,500. Osborne said he will work in partnership with local authorities in England to freeze council tax in 2011-12 and reduce the main rate of corporation tax from 28% to 24% over four years, beginning April 2011. This will give the UK the lowest rate of corporation tax in the G7 and the fifth lowest rate in the G20.
Sterling reacted positively to the news, climbing 0.6% to $1.4847 against the US dollar. Meanwhile, EUR/GBP sank 0.73% to 0.8287.
By 4.10pm (London time) the FTSE 100 traded 59.54 points lower (-1.14%) at 5239.57, up from an earlier low of 5210.02. At the same time, the Dow Jones Industrial Average traded 11.87 points (-0.11%) lower at 10430.54 while the S&P 500 lost 2.55 points (-0.23%) to 1110.65. Bucking the trend was the NASDAQ 100 which rose 6.80 points (+0.36%) to 1902.64.
Wall Street was dragged lower after the National Association of Realtors announced that the number of existing home sales fell to 5.66 million in May. This compares with expectations for a rise to 6.12 million. With the number of building permits being issued on the decline, new home sales are also expected to plunge when they are released later this week. The fall in sales suggests the US real estate market is really struggling to gain traction in the absence of government incentive programs to stimulate demand.
A broad fall in commodity prices dragged resources stocks lower as well today, with Alcoa leading the fall on the Dow Jones, shedding 1.79% to $11.51, while Chevron and Exxon Mobil lost 0.73% and 0.36% respectively. Industrial majors have taken a hit on the Dow Jones with Caterpillar, General Electric and Du Pont all retreating as investors began to question how much of an impact China's recent flexible approach to the renmimbi will actually have on boosting US exports.
Meanwhile, drug store retailer Walgreen was the biggest faller on the S&P 500 today after it unveiled third-quarter results that missed analysts' expectations. The company reported profits of 53 cents a share before one-off costs, missing the 58 cent a share average shown in a Bloomberg survey of estimates. Walgreen's shares slumped 5.91% to $28.36
Tomorrow, the data US mortgage applications is scheduled for release along with new home sales and retail sales data. The Fed will also announce its latest interest rate decision in the evening.
