Autumn Budget now the 'crucial risk' for UK assets – Markets watching for a 'fiscal doom loop'

The PMI numbers out of the UK last week were a clear disappointment, in contrast with most of the real, albeit lagged data that we’ve received out of Britain of late.

The contrast with the much better surveys in the Eurozone meant that sterling spent most of last week continuing its slow grind lower against the common currency.

On the positive side, gilts are actually outperforming other sovereign bonds in relative terms, which is a pleasant departure from recent years, perhaps anchored by the highest yields in the G10.

Given the unsettled state of bond markets, next month’s Autumn Budget is emerging as the crucial risk on the horizon for UK assets generally. With yields surging, inflation rising and borrowing unexpectedly rising in recent months, Chancellor Healey is faced with an unenviable task.

The government has already effectively signalled that further tax hikes and higher borrowing are coming, so the key for markets will be whether Healey can communicate this in a way that allays fears of a fiscal doom loop, while still convincing investors that the measures are credible enough to support growth.