FTSE 100 Index outlook after Rachel Reeves tax increases: can it retest ATH?

The FTSE 100 Index rose by nearly 1% as UK bond yields plunged, as the market reacted to the latest budget reading by Rachel Reeves. The index, which tracks the biggest UK companies, rose for the second consecutive day, reaching a high of £9,690, its highest level since November 17. 

FTSE 100 Index and Sterling jumps as UK bond yields sink

The blue-chip FTSE 100 Index rebounded as investors reacted to Rachel Reeves budget speech in which she raised taxes by billions of pounds.

Sterling continued its recent recovery, with the GBP/USD exchange rate rising to 1.3255, its highest level since October 29. Similarly, the EUR/GBP pair dropped to 0.8750, its lowest level since October 28. Sterling also jumped against other currencies like the South African rand and the Swiss franc.

Most importantly, the bond market surged as Reeves’ budget proposal raised money that may stabilize the country’s finances over time. The 10-year UK government bond yield dropped to 4.42% from this week’s high of 4.622%.  

Similarly, the five-year yield dropped to 3.878%, its lowest level since November 13, while the closely-watched two-year fell to 3.70%.

Most FTSE 100 Index companies were in the green after her budget proposal. St. James Place stock price jumped by 5.30%, while Fresnillo, Endeavor Mining, Marks & Spencer, JD Sports, Lloyd’s, and Barclays jumped by over 3%. UK bank stocks jumped as Reeves abandoned the idea of a windfall tax.

Concerns on UK growth remains

Still, in the long term, Reeves’ budget proposal may have a negative impact on the economy. For one, she raised taxes by about £26 billion, with most of these funds going towards welfare spending.

Companies will have to pay a higher minimum wage, which may impact small and medium-sized businesses, while some notable names in areas like manufacturing may decide to shift operations out of the country.

Reeves also introduced a mansion tax that will levy a fee to people with houses valued at over £2 million. While this levy may raise billions of dollars, it may reduce the incentive of companies in the property industry to build. Also, there are chances that richer people will start moving out of the UK to other countries.

Most importantly, the budget did not offer any catalyst for boosting economic growth in the long term. Indeed, the OBR estimated that the economy will grow by 1.5% in 2029, down from the previous estimate of 1.5%. In a statement, one executive quoted by the FT said:

“There is nothing for growth in this Budget, the only thing they have done is increase the size of the public sector again — which is not the side of the economy responsible for growth.”

At the same time, there is a risk that the budget will fuel inflation in the coming weeks as companies will shift the tax increases to consumers. For example, estimates are that the average tax bill of a small shop will rise by between 40% and 65% next April.

Footsie 100 Index technical analysis 

The daily timeframe chart shows that the FTSE 100 Index has rebounded sharply in the past few months, moving from a low of £7,551 in April to the current £9,690.

It recently formed a doji candlestick pattern, which explains why it has rebounded in the past few days.

The FTSE 100 Index has jumped above the 50-day and 100-day Exponential Moving Averages (EMA)and the Supertrend indicator. 

It has moved above the ascending trendline that connects the lowest swings since June this year, a sign that bulls are in control.

Therefore, the most likely FTSE 100 Index is bullish, with the initial target being the all-time high of £9,945. A move above that level will point to more gains, potentially to the psychological level at £10,000.

On the other hand, a move below the ascending trendline will invalidate the bullish outlook and point to more downside, potentially to £9,400.

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