Rachel Reeves appears to have passed an initial market credibility test after UK assets rallied for the week following an Autumn Budget that proved less painful than initially feared.
Months of speculation ahead of the Budget had weighed on government bonds, London-listed stocks and the pound.
Investors had feared Reeves would fail to adequately address immediate concerns about Britain’s finances, and that fresh forecasts would force the Chancellor to saddle the country with even more damaging tax hikes.
Confirmation of a ‘fiscal blackhole’ of £6billion, compared to estimates as high as £40billion, meant Reeves could put more cash aside for fiscal headroom and spare consumers and households an even larger tax raid.
However, investors are closely monitoring Britain’s economy for signs of further stress and will continue to test the Chancellor’s fiscal credibility.
Here’s how markets reacted this week.
Close of play: City gives Autumn Budget cautious approval as UK assets rally for the week
Sterling traded slightly lower against the US dollar on Friday, but looks set to finish the week roughly 1 per cent higher at $1.32.
The long road to the Budget had weighed on sterling, amid fears Reeves would not give herself enough fiscal headroom, and the pound remains around 3.6 per cent lower against the dollar since mid-September.
The £22billion Reeves set aside for fiscal headroom far exceeded market expectations of around £15billion, which ultimately also provided a boost to UK government bonds after an initial wobble.
Gilt yields – the interest paid on government debt – were highly volatile on Wednesday.
The Office for Budget Responsibility’s inadvertently early publication of its forecasts for the UK economy, which slashed 2026 growth guidance from 1.9 to just 1.4 per cent, initially saw yields spike.
But the revelation that Reeves provided more fiscal headroom than initially suspected saw markets swing in the opposite direction, and gilt yields look set to end the week lower than where they started.
But Nikos Tzabouras, senior market analyst at Tradu, warned sterling and gilts are not out of the woods yet.
He said: ‘The Budget does little to tackle structural weaknesses or the subdued growth outlook, with the OBR cutting its 2026 GDP forecast and lifting its inflation projections.
‘The conflicting growth–inflation signals also complicate the outlook for Bank of England policy, adding another layer of uncertainty for sterling and gilts.
‘The Budget offers near-term reassurance, but with much of the new fiscal headroom back-loaded and borrowing set to increase, the medium-term picture for UK assets remains fragile.’
Mixed picture for stocks
The OBR’s publication of gloomy economic forecasts less than an hour before Reeves took to the dispatch box also initially dented the stock market.
London’s FTSE 100 index generates around 70 per cent of its earnings overseas, meaning it is less exposed to the tribulations of the more domestically-focused FTSE 250, which took the brunt of initial selling pressure.
The exception was the impact on shares in Britain’s biggest banks listed on the FTSE 100, which fell in response to the forecast.
However, banks bounced back after fears that Reeves would levy new taxes on the sector were ultimately dismissed.
Lloyds looked to be the biggest winner for the week after adding 9.2 per cent since Monday, while Barclays and Natwest are up 8.2 and 7.6 per cent, respectively. Asia-focused HSBC is up 1.4 per cent for the week.
A fresh gambling tax raid estimated to cost the sector £1.1billion a year from April meant a mixed week for Britain’s biggest gambling firms.
Paddy Power owner Flutter is up 2.5 per cent as investors judged the group was best place to weather the tax storm, which analysts say will boost the biggest operators.
William Hill owner Evoke has plunged 16.2 per cent for the week.
Mecca operator Rank has been the most volatile in the sector.
After initially soaring nearly 16.5 per cent on Wednesday in response to the scrapping of a so-called 10 per cent ‘bingo tax’, it has since fallen back to trade 1.5 per cent lower for the week after flagging an additional £40million in annual costs from the hike in remote gaming duty.
Housebuilders initially looked to be the biggest losers after Labour’s ‘mansion tax’ added to a growing list of woes facing the sector, but have also bounced back from an initial plunge.
Shares in Persimmon, Barratt Redrow and Taylor Wimpey are up 6.3, 3.4 and 2.4, respectively, for the week.
Berkely Group’s rally was the weakest, leaving it up by just 0.2 per cent for the week.
The FTSE 100 looks set to end the week 1.8 per cent higher at midday on Friday, while the FTSE 250 has rallied 3.5 per cent.
Duncan Green, UK All-Cap fund manager at Schroders, said: ‘The Budget has weighed on business investment and consumer confidence, and while today’s announcement brings some clarity, markets remain cautious given fiscal tightening has been largely pushed out to later years and a slight downgrade to the UK growth outlook.
‘Importantly though, the Chancellor avoided the inflationary missteps of previous Budgets.
‘The new measures align with the Bank of England’s goal to bring inflation sustainably back to target, with planned energy-bill reductions helping.
‘The Chancellor also secured a larger fiscal buffer than expected, which markets welcome as a sign of discipline.
‘The sectoral impacts are mixed. Housebuilders received little direct support, and gambling firms face higher duties, while banks were spared new taxes.
‘With attractive valuations and continued underperformance versus the FTSE 100 and global peers, UK mid- and small-caps could be well positioned as stability returns.’
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