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FTSE 100 up as traders digest Truss's corporation tax U-turn after rollercoaster ride

Liz Truss
Liz Truss said her mission remains the pursuit of a 'low-tax, high-wage, high-growth economy' as she made another U-turn on Friday. The FTSE 100 closed in the green. Photo: Reuters/Scott Heppell (Scott Heppell / reuters)

European shares closed in the green on Friday as UK prime minister Liz Truss delivered another U-turn on parts of her £43bn ($48bn) tax cut plan in a press conference.

The FTSE 100 (^FTSE) was up 0.2% on the day in London, the CAC 40 (^FCHI) was 1.1% higher in Paris, and the DAX (^GDAXI) rose 0.8% in Frankfurt.

Truss said her mission remains the pursuit of a "low-tax, high-wage, high-growth economy", but accepted parts of the fiscal plan on 23 September went "further and faster" than markets had expected.

She reversed a key policy to scrap the planned rise in corporation tax from 19% to 25%, as was planned by former chancellor Rishi Sunak under Boris Johnson's government.

"Markets turn lower as we head towards the weekend, with Liz Truss budget reversal seeing economic uncertainty traded for political instability, said Joshua Mahony, senior market analyst at online trading platform IG. "Kwasi Kwarteng has been ousted from No 11 just three-weeks on from the fateful mini-budget that was ultimately responsible for his demise."

It comes as the BoE is set to stop its £65bn government bond-buying scheme after attempting to reassure Britain's financial markets.

Andrew Bailey is due to end Threadneedle Street's massive buy up of government debt in a bid to stave off a pension funds collapse. But whether that has been enough to soothe market jitters remains to be seen.

The Bank governor spooked the markets by insisting that the emergency support would not be extended.

UK bonds are headed for the biggest weekly rally since 2011 as markets assess the economic and political turmoil.

The price of the 30-year gilt jumped, pushing the yield down 0.25 percentage points to 4.33%. It had been above 5% earlier in the week.

Read more: Bank of England warns UK households may face 2008 financial crisis mortgage strain

Meanwhile, the pound (GBPUSD=X) slide after Kwarteng was sacked as chancellor and Jeremy Hunt appointed in an overhaul of the Treasury department.

Truss has also reshuffled chief Treasury secretary Chris Philp to another department.

Traders have been left pondering the impact of the sudden sacking of Kwarteng and a fresh bout of political uncertainty, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown notes.

"Since his departure was made clear, 10-year gilt yields have edged up slightly and the pound fell below $1.12, with no fresh euphoria in sight as markets digest another bout of political upheaval," she said.

"For now the prime minister has won breathing space, but the financial markets are highly sensitive and anything less than a co-operative approach with the Bank of England, the Office of Budget Responsibility and international institutions could cause fresh instability."

Across the Atlantic, Wall Street indices lost early gains, reversing a rally from the previous session, a day after inflation in America hit a 40-year high.

US consumer price index (CPI) stood at 8.2% last month, down from 8.3% in August but higher than economists had expected.

Core CPI, which outstrips volatile food and energy components, jumped to 6.6% over the period, higher than forecast, and the highest since 1982. This is a key indicator of how price rises have become embedded across the economy.

Read more: How record high US inflation can hit UK markets, the pound, and 'Trussonomics'

The S&P 500 (^GSPC) pushed 1.3% higher, after rallying off its lowest levels in 20 months on Thursday. The tech-heavy Nasdaq (^IXIC) declined 1.7%, while the Dow Jones (^DJI) lost 0.6% at Europe's close.

Asian stocks finished in the green overnight on hopes of more Chinese stimulus.

In Tokyo, the Nikkei (^N225) surged 3.3%, while the Hang Seng (^HSI) edged 1.9% higher in Hong Kong and the Shanghai Composite (000001.SS) gained 1.8% in mainland China.

Richard Hunter, head of markets at Interactive Investor, said: "Supportive comments from the Chinese authorities buoyed Asian markets, with the central bank promising more support to an economy which has been hamstrung by COVID-19 lockdowns, deteriorating consumer sentiment and a hapless property sector.

"However, sentiment also remains on edge with the larger threat of global recession in play."

Watch: How does inflation affect interest rates?