UK markets were on Monday in focus as the pound crashed to an all-time low and bond yields surged to the highest in more than a decade, sparking talk of emergency action by the Bank of England. The market mayhem unleashed by the government’s fiscal plan on Friday went into overdrive after the government pledged further tax cuts.
While the UK markets tumbled, Rishi Sunak, former chancellor who lost out to Liz Truss in the race to become leader of the ruling Conservative party earlier this month, started trending on social media, including Twitter.
In August, Sunak had warned that it would be “complacent and irresponsible” to ignore the risk of markets losing confidence in the British economy, as wagers against UK government debt sent short-term borrowing costs in the gilt market soaring.
“There will be a run on sterling. The gilts market will be in freefall. And the FTSE will tumble as global investors take fright and sell off every form of British asset. It might take only a few days, or the government might stagger through until the end of September, but before long Liz Truss and her new Chancellor Kwasi Kwarteng will have been forced to call in the IMF to stabilise a collapsing economy,” Sunak had said, The Spectator reported.
In an interview with the Financial Times, Sunak had said Truss had made unfunded spending commitments that he feared could force up inflation and interest rates, and increase UK borrowing costs. The former chancellor said he “struggled to see” how Truss’s promises of sweeping tax cuts and help for families struggling with soaring energy costs “add up”.
Also Read | Pound hits 37-year low below $1.12 as recession fears grow
Lauding Sunak, one Twitter user said, “He was ridiculed for predicting it, but it looks like Rishi Sunak was right.”
Another user wrote, “Liz Truss can’t say she wasn’t warned that her plan was a fairy tale. Rishi Sunak(former Chancellor) – “We have to be honest. Borrowing your way out of inflation isn’t a plan – it’s a fairy tale.”
One user tweeted, “Looks like Rishi Sunak was the right candidate. He lost because of his skin colour.”
On Monday, an index of global stocks traded at the lowest since 2020, while US futures dropped on fears that Federal Reserve rate hikes to combat persistently elevated inflation will hurt the economy and a measure of volatility jumped, Bloomberg reported.
Sterling dropped to as low as $1.0350, taking it closer to parity with the dollar, though it pared losses to about $1.08 after Sky News reported that the BOE is expected to make a statement. Britain’s central bank is watching the market closely and has yet to decide whether to comment, according to someone with knowledge of the situation.
The plunge in UK gilts sent 10-year yields above 4 per cent for the first time since 2010. Traders ramped up wagers on the scale of interest-rate hikes in the short term, with money markets pricing in more than 200 basis points of increases by the central bank’s next meeting in November.
Currency traders are finding developed markets trickier to navigate than their emerging counterparts. The euro fell as investors weighed the prospects of Italy under the most right-wing government since World War II, though Giorgia Meloni struck a conciliatory tone after her election win.
Geopolitical risks from the war in Ukraine to escalating tensions over Taiwan and unrest in Iran also weighed on sentiment. Meanwhile, the OECD cut almost all growth forecasts for the Group of 20 next year while anticipating further interest-rate hikes. A gauge of German business confidence deteriorated.
Treasuries extended their worst bond slide in decades as a dollar gauge rose to yet another record. The currency’s rally is “untenable” for risk assets including stocks, and in the past this kind of dollar strength has led to some kind of financial or economic crisis, according to Morgan Stanley strategists led by Michael Wilson.
In Asia, the yen weakened through 144 to the greenback, while remaining short of the point last week that drew intervention from Japanese authorities. The yuan fell for a sixth day in the longest losing streak in three years, even as China said it would raise the risk-reserve requirement to increase the cost for shorting the currency.
“It’s a king US dollar,” Sian Fenner, senior Asia economist for Oxford Economics, said on Bloomberg TV. “It’s adding to inflationary pressures and more central banks raising rates more than we have historically seen.”
Trading this week will be punctuated by a number of economic reports including US initial jobless claims and gross-domestic-product data, along with PMI figures from China. Choppiness in price moves is likely with a steady stream of Federal Reserve officials speaking through the week.
CNN reported that while finance minister Kwasi Kwarteng said the government would cut personal income taxes and cancel plans to raise business taxes next spring, calling for a “new approach for a new era, focused on growth,” investors aren’t convinced that the unconventional approach will actually help the economy, which the Bank of England warned this week was already likely in a recession. A number of them called it a huge gamble.
(With inputs from Bloomberg, Reuters)
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