Fifty shades of taxes

The week opens on a cautious note after last week’s Nvidia earnings didn’t really go according to plan. Swelling inventories and deferred payments raised concerns about the strength of Nvidia’s revenue and added to worries that AI spenders may simply be spending too much — in some cases by expanding debt that doesn’t even appear on their own books. So, the AI boom is turning into an accounting stress story due to some companies’ choice to do strange things on their books. And that could end in tears. The interconnected nature of the business and the circularity suggest that if one company fails to pay a bill, we could see a domino effect across the sector.

The nerves are calmer this morning, but not fully so. Alibaba in China jumped 5% after announcing that its Qwen 3 model attracted more than 10 million followers and could rival ChatGPT. The company will report earnings tomorrow. The Kospi made a recovery attempt at the weekly open, but most gains were given back as we approached the European open. Japanese markets are closed, so we can’t look at SoftBank to gauge how investors feel about the whole AI situation. At this point, it’s safe to say that AI will outlive any potential market meltdown. But the short term looks a bit fragile for our favourite tech bros.

The S&P 500 and Nasdaq futures are slightly in the green following a modest improvement in investor mood on Friday after NY Fed President John Williams jumped in and poured some cold water on the overheated market by bringing the possibility of another near-term cut back to the table. Everyone heard that as a December rate cut, of course. The US 2-year yield fell back to 3.50% and the probability of a December cut jumped to 70% — from below 29% earlier in the same week. Holy!

Other Fed members kept repeating that it would be better to wait before doing anything more, just in case the inflation monster wakes up and throws fireballs everywhere. But no — one man, one dove — outweighed all the other members who sounded worried about inflation, which is still near 3% in the US and well above the Federal Reserve’s (Fed) official target. In theory, the Fed should never have cut in September in the first place. Fun fact: we won’t even get the most critical inflation report before the Fed meets for the last time this year. So, they will just have to sit there and bet. They won’t decide — they will take a bet.

Meanwhile, consumer sentiment fell to the lowest levels on record in the US, even after Trump announced that he will lower tariffs on beef, tomatoes, coffee and bananas. The US dollar spent most of last week gaining ground against majors. The recovery was backed by a retreat in dovish Fed expectations before Williams’ dovish comments on Friday. The greenback is under pressure this morning, but the Fed cut probabilities have themselves become shaky, so I’d say the chance of a December cut is still a coin toss. And again, in theory, a no-cut would be the reasonable path — especially given that the Fed will stop QT in December.

But sterling bears won’t need help from dollar bulls to push Cable below 1.30 this week. Rachel Reeves could do that with grace on Wednesday when she announces the much-anticipated Autumn Budget — and potentially big tax hikes. At this point, no one knows what will come out of that Budget, but she might have to raise taxes by as much as £30bn. Disaster. We’ve been reading all week about the Fifty Shades of Taxes the Brits are facing — both at individual and company level. If I’m honest, I’m waiting for Season Two of the Mini-Budget crisis to unfold later this week if taxes don’t match market expectations.

On a more optimistic note, such large tax hikes would be deflationary and could convince the Bank of England (BoE) to cut rates as soon as December to clean up part of the mess. And if — by miracle — Rachel Reeves gets this right, Cable could rebound and close the year above 1.30. But there is a good chance that we will see agitated waters for sterling and gilts this week than the contrary. The UK needs a solid plan to survive the series of poor fiscal decisions and return to growth. Higher taxes are good for the short run, but they kill growth in the long run.

According to a Financial Times analysis, 3,790 company directors reported leaving the UK between October 2024 (when Reeves’ Budget hit) and July 2025, and a survey by Rathbones found that around 12% of SME owners said they are considering relocating either themselves or their business abroad because of tax concerns. Favourite destinations include the UAE, Spain and the US — of course. And given the market’s unwillingness to finance British debt, the larger the outflow of taxpayers, the bigger the budget hole, and the heavier the tax burden for those who stay. So, prepare a tissue box for Wednesday. There will be tears — and not happy ones.