UK borrowing decline helps lift hopes of March tax cuts

• FTSE declines despite drop in public sector borrowing
• Chinese stimulus rumours spark overnight volatility
• US earnings in view

The FTSE 100 has found itself on the back foot in early trade despite a welcome decline in UK public sector net borrowing for December. With government borrowing down from £12.8 billion to £6.8 billion, we are seeing a stronger fiscal position driven by improved tax receipts (up 5.3%) and reduced debt-interest costs (down 28%). With borrowing now down to the lowest December reading since 2019, Chancellor Jeremy Hunt will likely be preparing to lay out a more generous package of tax cuts in the upcoming March budget. While Hunt will undoubtedly look to help Rishi Sunak’s chance at this year’s general election, there is a fine balancing act required given the need to drive down the net debt figure, which has surged to 97.7% of UK GDP.

Asian markets saw volatility overnight, although it came from a somewhat unexpected source. The Bank of Japan’s interest rate decision went off in a relatively serene manner, with the bank providing little by way of fireworks. However, the Nikkei’s stellar run came under pressure in response to actions from across the East China Sea, with rumours of a Chinese $278 billion rescue package to ‘save’ their stock market reversing the recent ‘long Nikkei-short China/Hong Kong’ trade. The huge divergence between Chinese and Japanese equities has brought huge interest over whether we could soon see a catch-up move come into play for the likes of the Hang Seng and Shanghai Composite.

Today sees markets turn back towards US earnings as a driver of sentiment, with a host of top tier names due to report. Earnings from Johnson & Johnson, Procter & Gamble, Netflix, Verizon, Texas Instruments, and General Electric provide us with an insight across a whole range of segments within the US economy. Thus far we have seen a particular focus on the banking sector, with 30% of the financials having reported. However, we will be looking for greater insight into US consumers today, with both cyclicals and non-cyclicals having thus far struggled to match market expectations around revenues.