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UK equities fell sharply on Friday as government bond yields surged, following reports that Finance Minister Rachel Reeves has abandoned plans to raise income tax in the upcoming budget. The policy reversal surprised investors who had expected tax increases to help address a projected fiscal shortfall.
The FTSE 100 declined 1.1%, its steepest one-day drop since April, when global markets slumped in response to U.S. tariff developments. Despite the selloff, the index still posted a modest 0.2% gain for the week. The FTSE 250 slipped 0.8%, though it also ended the week up 0.2%.
Markets React to Abandoned Tax Hike
Initial reports from the Financial Times triggered a sharp market reaction, and although sentiment stabilized somewhat as additional outlets — including Reuters — cited improved fiscal forecasts as the reason for the U-turn, gilt yields continued to climb. The 10-year gilt yield appeared on track for its largest one-day jump since July, while sterling eased 0.3%.
Investors had anticipated a rise in income tax as part of Reeves’ fiscal consolidation efforts. The reported reversal raised concerns over how the government will address the deficit without additional revenue measures.
Broad-Based Declines Across Sectors
Banking stocks led the downturn, with the sector dropping 2.2%, while precious-metal miners fell 2.4% amid declining gold prices. Global market pressures also weighed on sentiment following comments by U.S. Federal Reserve officials that cast doubt on the possibility of a December rate cut. Uncertainty surrounding U.S. economic data and renewed concerns over a potential AI-driven market bubble further dampened risk appetite.
In domestic markets, the UK real estate sector declined 2.2%. Land Securities reported a fall in property valuations for the first half of its fiscal year, sending its shares down 5.2%. Melrose Industries fell 1.2% after reaffirming its full-year guidance.
The Bank of England announced it is considering regulatory changes aimed at improving life insurers’ access to capital markets, responding to industry concerns over increasingly constrained funding conditions.
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