Burnham's tax cuts 'sugarcoat the pill' – further Sterling downside likely

Both the pound and gilts sold off in Thursday morning London trading before stabilising as the day progressed. Andy Burnham's first week as prime minister is drawing to a close, and — as is customary when a new occupant arrives at Number 10 — it hasn't been a quiet affair.

Beyond the usual ministerial merry-go-round, the headline-grabbers have been tax cuts to electricity bills and pub rates, and the reversal of Starmer's hike to the bus fare cap.

While encouraging on the surface, these announcements have left investors jittery, given that: a) it's unclear how the cuts will be funded, and b) they raise the risk of further tax hikes or additional borrowing down the line.

At risk of sounding overly cynical, we see an element of sugarcoating the pill here. These are cuts that are cheap to deliver but politically potent - low-cost measures with high visibility, the kind that make for good headlines without denting the public finances much on their own.

Burnham's track record points to fiscal expansion rather than tightening, and we see it as inevitable that this initial round of crowd-pleasing, low-cost tax cuts will be followed by a much heftier bill at the Autumn Budget in a few months' time.

Markets appear to hold a similarly sceptical view, which suggests further downside in sterling in the immediate-term.