London stocks were still weaker by midday on Tuesday, joining a broader market selloff, as Chancellor Rachel Reeves' pre-Budget speech sent sterling to a seven-month low against the dollar.
The FTSE 100 was down 0.6% at 9,644.66, while sterling was off 0.5% against the dollar at 1.3070, after Reeves hinted at income tax rises.
In a speech ahead of the Budget on 26 November, Reeves sought to reassure markets that there would be no major rise in spending but also refused to rule out any tax increases as she faces a spending black hole of up to £30bn.
Reeves said more challenges had emerged since her last that Budget, citing the "continual threat of tariffs" which had hit global confidence "deterring business investment, and dampening growth", along with persistent inflation, increases in the cost of government borrowing and defence spending.
She added that the commitment to her self-imposed fiscal rules was "ironclad", warning that there were limits on the price that banks, hedge funds and pension investors were willing to pay for government debt.
"The more we try and sell, the more it will cost us. It is important that everyone - the public and politicians - understands that reality. The less we spend on debt interest, the more we can spend on the priorities of working people," she said.
Reeves said she would not avoid making difficult choices, in yet another sign that the government is prepared to break pledges not to increase income tax, VAT or national insurance.
"I could do what previous governments have done, which is to sweep those challenges under the carpet, to cut capital spending, to make the numbers up," she told reporters after the speech. "But then we'd be back here in a year, in five years' time, with productivity still on its knees, growth under-performing, national debt continuing to rise. So I'm being honest with people."
Kathleen Brooks, research director at XTB, said: "The knock to the pound contrasts with the Gilt market, as bonds bounce on Tuesday. UK Gilt prices are higher across the board, while yields are falling. UK 10-year yields are lower by 2 bps, while 30-year yields are down by a similar amount.
"Gilts have been a major outperformer over the past 3 months, and in the past month, in particular. The 30-year Gilt yield is lower by 36bps in the past month and the 10-year yield is lower by 31bps.
"This does not mean that the Gilt market is giving the Chancellor's plans for tax rises without meaningful public sector spending cuts or cuts to the benefits bill, a ringing endorsement. Instead, a rise in the tax base could make it easier for the Chancellor to build bigger fiscal headroom, the amount that the country has to spare if a crisis hits.
"The bond market is happy with the government building up the UK's rainy-day fund, as it makes the debt we need them to buy safer. The question now is, will Gilt yields continue to fall?"
In equity markets, Associated British Foods fell after saying it could split its Primark and food businesses under a review of its group structure currently underway in consultation with its biggest investor Wittington Investments, which remains committed to maintaining majority ownership of both businesses.
The company added that Primark's adjusted operating profit margin was expected to be slightly below last year as it focused on investing in growth to drive sales after posting a 26% fall in profit to £1.4bn for the year to 13 September amid a subdued consumer environment.
Heavily-weighted miners were among the worst performers on the FTSE 100 as copper and iron ore prices fell, with Antofagasta, Anglo American and Glencore all lower.
BP nudged down even as the oil giant beat market forecasts with its third-quarter earnings and said it expects divestment proceeds to be higher than previously expected. Underlying replacement cost profit totalled $2.21bn, down from $2.35bn in the second quarter and $2.27bn in the third quarter of 2024, as improved profitability was offset by a higher underlying effective tax rate.
However, that was ahead of the consensus forecast of $2.02bn. Meanwhile, the company said divestments and other proceeds would now be above $4bn in 2025, ahead of previous guidance of $3-4bn.
IWG and Domino's Pizza were also weaker after trading updates.
On the upside, housebuilder Barratt Redrow rose ahead of a trading update on Wednesday, while Diversified Energy surged as the gas producer boosted full-year guidance following a strong third quarter.