Gilts in focus again, property prices fall, FTSE up and BP bumper profit will increase windfall tax clamour

“The cost of government debt is once again at the forefront of investors’ minds as the Bank of England kicks off a new programme to sell down its gilt holdings as it unwinds quantitative easing,” says Russ Mould, Investment Director at AJ Bell.

“It is hoped the Bank’s decision to currently not sell any long-dated gilts (20 years+) should help alleviate any concerns that this new programme will undo all the support it gave to markets last month when it bought gilts in the wake of the government crisis, in turn helping to drive down yields.

“In early trading, the UK five-year gilt traded at 3.514% versus 3.609% in the previous close. The 10-year gilt stood at 3.418% versus 3.51% yesterday.

“Markets expect a 0.75 percentage point increase for the UK base rate at Thursday’s meeting, taking rates to 3% as the Bank of England continues to fight inflation. As ever, we’ll see some investors demand aggressive action from the central bank to stop inflation getting out of control, but others will be worried that too big a rate hike is inappropriate for consumers and businesses already under financial pressure.

“The housing market is already feeling the impact of higher rates as property prices come down. Nationwide’s latest survey shows the first decline in UK house prices in 15 months as higher borrowing costs make moving house unaffordable for many people.

“Interestingly, banking stocks moved higher on the news. Banks can earn more money when interest rates are going up, and in theory lower property prices act as a support for mortgage lending. Bank shares might also be extending gains seen yesterday on reports that the government wouldn’t impose a windfall tax on the sector. However, banks still face a negative issue in that higher interest rates will put even more pressure on household finances and raise the prospect of more bad debts on loans.

“This strength in banks’ share prices gave support to the FTSE 100 alongside big moves from miners, insurers, and retailers. In fact, most of the index’s constituents were in positive territory with only three fallers: Bill Ackman’s Pershing Square Holdings investment vehicle, together with BP and Rentokil which both eased back on their latest results.”

BP

“For anyone facing eye-watering increases in their energy bills, BP’s latest bumper results will be like a red rag to a bull.

“The better-than-expected results and extra cash on offer for shareholders will only add to the mounting clamour for an extended windfall tax on what are deemed excessive profits which have come about due to a ruinous war in Ukraine.

“As the UK looks to cushion the blow for households there is a strong case for BP paying more to help shoulder the costs of any support package.

“However, what sometimes gets lost in this debate is that BP is an international business and that all but a relatively small chunk of its earnings is outside the remit of the HMRC.

“Because the existing windfall levy can be offset by investment BP makes in the UK it is only paying a little bit on top of what it already does to the Exchequer.

“A risk for BP is that governments in its other jurisdictions decide they might look to be more aggressive in their taxation policies.

“Thanks in part to strong commodity prices, BP CEO Bernard Looney can argue his charge is sticking to the maxim of ‘performing while transforming’. However, he will be aware that thanks either to a drop in oil and gas prices or increased taxation and regulation, performing like it has in 2022 will be some challenge.”

These articles are for information purposes only and are not a personal recommendation or advice.