London close: Stocks slide on income tax U-turn, Fed rate cut doubts

London stocks fell sharply on Friday, sterling lost ground and borrowing costs rose amid reports that Chancellor Rachel Reeves has ditched plans to raise income tax at the upcoming Budget, while fading hopes of a US December rate cut and worries about an AI bubble also dented the mood.

The FTSE 100 ended down 1.1% at 9,698.37, while the pound was 0.3% lower against the dollar at 1.3154. The top-flight index suffered its worst one-day decline since 9 April, when global markets were rattled by US President DonaldTrump's tariff announcements.

The chancellor had been widely expected to raise the rate for both higher and basic income tax payers at this month's Budget, despite manifesto pledges to the contrary

But according to the Financial Times, which first broke the apparent about-turn, the chancellor has "ripped up" proposals to raise both basic and higher income tax rates. Citing unnamed officials briefed on the move, the newspaper said Number 11 was concerned any hike would anger voters and antagonise Labour MPs.

However, subsequent reports said the decision had been taken because the government had received a better-than-expected fiscal forecast from the Office for Budget Responsibility.

Citing unnamed people familiar with the matter, both the FT and Bloomberg said an expected black hole of up to £35bn was now closer to £20bn.

More broadly, ongoing worries about a potential AI bubble and growing doubts that the Fed will cut rates in December also dented sentiment.

Dan Coatsworth, head of investment at AJ Bell, said: "Markets are down across the board as investors fret about cracks in the narrative that’s driven the mother of all tech rallies over the past few years. Investors are worried about rich equity valuations and how billions of dollars are being spent on AI just at a time when the jobs market is looking fragile.

"News that Michael Burry, the inspiration behind The Big Short film, is closing his hedge fund also troubled the market, leaving more questions than answers.

"Despite the doom and gloom, the scale of the market pullback wasn’t severe enough to suggest widespread panic. A 1% decline in the FTSE 100 is not out of the ordinary for a one-day movement when markets are feeling grumpy.

"Investors in the UK have their own issues to process, let alone whether there is a potential AI bubble waiting to burst. Speculation that Chancellor Rachel Reeves has ripped up part of her Budget plan only days before the big event has spooked the bond market.

"Gilt yields moved higher on talk that the chancellor won’t raise income tax rates, leaving bond investors wondering which alternative path she might take to repair UK public finances. Bond markets should, in theory, want the government to take bold decisions rather than tinkering at the edges. For a while it looked as if this might happen, but the latest reports about a policy rethink would suggest otherwise."

A raft of disappointing Chinese data also did nothing to lift the mood.

In equity markets, Land Securities slumped as it lifted its full-year earnings guidance but reported drop in half-year pre-tax profit to £98m from £243m.

Third Bridge analyst Max Harper said this was short of the £274.2m expected and mainly reflects capital recycling of low-return assets and losses on disposals. He also said "weaker-than-expected profit should be partly balanced by solid rental growth and some guidance upgrades".

Banks were also in the red amid Budget uncertainty, with NatWest, Barclays and LLoyds all lower. Ben Coatsworth explained: "Higher gilt yields can drive up fixed-term mortgage costs because they are used as a benchmark by lenders when pricing long-term products. The situation is bad news for mortgage lenders as pricier home loans could make it more challenging for certain people to get on the housing ladder."

Aerospace company Melrose Industries dipped as it held annual guidance after "significantly higher" adjusted operating profit in the four months to 31 October on the back of a 14% rise in revenues, driven by engine aftermarket services.

SSE was weaker after a downgrade to ‘sell’ at Citi.

On the upside, PPHE Hotel Group surged after its two biggest shareholders confirmed they plan to hold "a small handful" of meetings with financial investors about a range of potential options which include contributing growth capital and a potential "partial monetisation" of their stakes.

Market Movers

FTSE 100 (UKX) 9,698.37 -1.11%
FTSE 250 (MCX) 21,819.56 -0.80%
techMARK (TASX) 5,542.18 -0.77%

FTSE 100 - Risers

DCC (CDI) (DCC) 5,020.00p 1.66%
WPP (WPP) 288.30p 0.63%
Burberry Group (BRBY) 1,232.00p 0.33%
AstraZeneca (AZN) 13,532.00p 0.28%
Rentokil Initial (RTO) 403.60p 0.27%
BP (BP.) 460.80p 0.16%
Reckitt Benckiser Group (RKT) 5,844.00p 0.14%
Admiral Group (ADM) 3,154.00p 0.13%
BAE Systems (BA.) 1,807.00p 0.03%
RELX FINANCE BV 3.375% GTD NTS 20/03/33 (BW73) 98.64p 0.00%

FTSE 100 - Fallers

Metlen Energy & Metals (MTLN) 42.45p -6.08%
Land Securities Group (LAND) 613.00p -5.26%
Kingfisher (KGF) 295.60p -4.03%
Entain (ENT) 700.40p -3.71%
NATWEST GROUP (NWG) 600.80p -3.59%
Smurfit Westrock (DI) (SWR) 2,603.00p -3.38%
Barclays (BARC) 413.50p -3.22%
Tesco (TSCO) 437.30p -3.10%
Lloyds Banking Group (LLOY) 91.50p -2.78%
Associated British Foods (ABF) 2,160.00p -2.75%

FTSE 250 - Risers

PPHE Hotel Group Ltd (PPH) 1,714.00p 14.27%
IP Group (IPO) 61.90p 3.17%
Ocado Group (OCDO) 225.00p 2.97%
Computacenter (CCC) 2,892.00p 2.34%
JPMorgan Japanese Inv Trust (JFJ) 747.00p 1.63%
Premier Foods (PFD) 173.20p 1.41%
Telecom Plus (TEP) 1,712.00p 1.30%
International Personal Finance (IPF) 208.50p 1.21%
HICL Infrastructure (HICL) 117.80p 1.20%
Watches of Switzerland Group (WOSG) 444.40p 1.18%

FTSE 250 - Fallers

Ceres Power Holdings (CWR) 353.00p -4.85%
QinetiQ Group (QQ.) 445.20p -4.55%
Breedon Group (BREE) 318.80p -4.09%
RHI Magnesita N.V. (DI) (RHIM) 2,400.00p -4.00%
Great Portland Estates (GPE) 324.50p -3.71%
4Imprint Group (FOUR) 3,825.00p -3.65%
Derwent London (DLN) 1,724.00p -3.58%
Travis Perkins (TPK) 587.50p -3.53%
AJ Bell (AJB) 510.00p -3.41%
Trustpilot Group (TRST) 175.30p -3.31%