Investors fear repeat of Truss era market chaos as UK Budget looms

Financial markets are on edge as concerns grow that the upcoming October 30 UK Budget could trigger a repeat – but not of the same scale – of the market chaos that followed Liz Truss’s infamous 2022 mini-budget.

This is the warning from Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory organisations, as Chancellor Rachel Reeves today submits her tax and spending plans to the Office for Budget Responsibility (OBR).

He comments: “With mounting speculation that she may revise the UK’s debt rules to allow for higher borrowing, there are fears of an investor backlash.

“In the weeks leading up to the Budget, UK gilt yields—widely seen as a barometer of investor confidence—have surged from 3.75% to around 4.2%.

“This rise, a clear signal that investors are offloading government debt, indicates growing concerns that the Chancellor may prioritize fiscal stimulus over long-term sustainability.

“The response recalls the shockwaves from Truss’s controversial fiscal plan in September 2022, which triggered a massive sell-off of UK gilts, rattling markets and forcing emergency interventions.”

The fears surrounding the upcoming Budget are also evident in currency markets.

“Sterling, which had been gaining ground earlier in the year, has seen its rally reverse, slipping against both the dollar and euro. Currency traders are increasingly factoring in the potential for increased borrowing, which could put further pressure on the pound in the weeks ahead.”

Investors remember all too well the consequences of misjudged fiscal strategies, as seen under Truss, and are wary of any moves that could upset the current fragile equilibrium.

In addition, consumer confidence in the UK fell sharply in September, reflecting growing anxiety about the economy’s trajectory. While inflation has cooled from its previous highs, the impact of elevated interest rates is still hitting both businesses and consumers, leaving little room for fiscal missteps.

As Rachel Reeves prepares to deliver her Budget, she faces a precarious balancing act.

“The need for public investment is clear, but so too is the requirement to maintain market confidence,” notes Nigel Green.

Investors will be watching closely to see if the Chancellor introduces any significant changes to debt rules, and whether those changes come with a credible plan for fiscal responsibility.

“Markets are extremely sensitive to any signal that borrowing could rise significantly.

“The rise in gilt yields shows that investors are already pricing in the possibility of increased borrowing, and if Reeves doesn’t tread carefully, we could see a repeat, albeit to a lesser degree, of the panic that followed Truss’s mini-budget,” he concludes.