The markets have rebounded – but how long for?

So, no Black Friday. The pound is steady, the FTSE100 up 1.5 per cent, the FTSE250 up more than 3 per cent. Just as fears grew that the end of the Bank of England’s gilt-buying programme could send pension funds to the brink and precipitate a fresh market crisis, the opposite happens: markets embark on a rebound.

It won’t necessarily last, of course. The long, miserable decline of stock markets and gilt markets this year has been punctuated, as ever, by periods of optimism, only for a fresh slide to begin. But for the moment it seems as if the big story that is driving markets is the expectation that Kwasi Kwarteng’s mini-Budget will see more U-turns – possibly as early as today – or even be dumped altogether. The Chancellor flew back early from an IMF meeting in Washington, catching the last plane to London. That hints that some announcement will be made today.

The trouble is that a major U-turn on tax cuts is now built into market expectations. If Kwarteng does not make such an announcement a lot of investors are going to be very disappointed. If they sense that the Chancellor is only prepared to make minor changes to the tax-cutting programme, it could be a different story by lunchtime. There is also the effect of US inflation figures to look at. US consumer prices, it was revealed yesterday, are still growing at 8.3 per cent a year. Even by quoting ‘core inflation’, a pretty preposterous measure which strips out food and energy and can hardly therefore claim to measure the cost of living, inflation comes out at 6.6 per cent. It is likely to mean that US interest rates remain higher for longer – not what markets want to hear.

No one knows for sure, either, whether pension funds have managed properly to cover their positions thanks to the Bank of England's gilt-buying programme. Any hint of trouble for pension funds will send gilt markets into a further tailspin.

There is a possible long-term effect of the events of the past three weeks. Will it make this government, and future governments, shy of making tax cuts, even when (and if) the public finances are in better shape? The fear now is that Kwarteng and future chancellors will be shy of making any kind of tax cuts for fear that they will upset markets. That is not going to help the economy grow, and could lead to a lower trajectory for company profits for years to come.