- European markets gain as UK moves help sterling and gilts
- Nikkei down 1.2%, S&P 500 higher after slide
- Dollar near 149 yen, market wary of intervention
- China’s yuan falls after Xi’s congressional speech
LONDON, Oct 17 (Reuters) – Europe’s stocks, bonds and major currencies rallied on Monday, helped by relief that Britain’s new finance minister had quickly shredded virtually all of the unfunded tax cuts that sparked Britain’s market turmoil this month.
Asia’s major stock markets had struggled overnight but Europe’s STOXX 600 (.STOXX) was up 0.6% and Wall Street futures were up over 1% as sterling and UK government bonds soared in London. /GB/FRX
Britain’s new Treasury Secretary Jeremy Hunt has announced he will reverse “almost all” of the tax measures that Prime Minister Liz Truss and his predecessor Kwasi Kwarteng decided just three weeks ago.
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Bank of England Governor Andrew Bailey gave Hunt a vote of confidence on Saturday, saying they had an “immediate disagreement” over the need to repair public finances, where there are estimates of a £70 billion black hole ($78.72). billion US dollars).
Hunt said in his statement that it “wouldn’t be right to borrow to fund these tax cuts” and that his measures would raise over £30billion. John Hardy, Saxo Bank’s head of FX strategy, said the UK’s troubles would remain the focus, however.
“It’s a proposition for stability in the sterling and UK bond markets that goes in the right direction,” Hardy said, noting the sterling’s rally against the dollar and the euro as a thumbs-up from the market for Hunt’s moves.
“But I think we’ve probably gone as far as we can with the sterling move… We still have nothing to address the UK’s structural issues that caused the weakness in the first place – a massive gaping twin deficits that are yet to come.” must be funded.”
However, the reactionary rally saw UK 10-year gilt yields fall 34 basis points to 3.97%, while 30-year gilt yields fell 38 basis points to 3.78%. . Yields reflect the cost of borrowing and move inversely with the price of a bond.
Other European markets also benefited, including the German 10-year Bund yield, which slipped to 2.245% after hitting 2.423% last week, its highest level since August 2011.
It did so even as two key ECB policymakers pledged to trim banks’ balance sheets over the weekend and after Friday’s US inflation data bolstered bets of another aggressive Federal Reserve rate hike next month.
ROTATE
Overnight, MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) fell 0.6%, back towards last week’s 2-1/2 year low.
Japan’s Nikkei (.N225) shed 1.2% and although Chinese blue chips (.CSI300) rose 0.4%, uncertainty reigned as Beijing took the unusual step of delaying the release of economic indicators, including those due Tuesday Gross Domestic Product data for the third quarter.
The delay comes amid the week-long Congress of the ruling Communist Party, a biannual event that marks a particularly sensitive time in China and where President Xi Jinping is widely expected to win a landmark third term.
S&P 500 futures rose over 1% during the rally in Europe and after a sharp drop on Wall Street on Friday.
While the S&P is a staggering 25% off its peak, BofA economist Jared Woodard warned that the slide is not over yet as the world is transitioning from two decades of 2% inflation to around 5%.
“$70 trillion in ‘new’ technology, growth and government bond assets, valued for a 2% world, are vulnerable to these secular shifts as ‘old’ industries like energy and materials grow strongly and end decades of underinvestment reverse,” he wrote in a note.
“Switching 60/40 proxies and buying what’s scarce — power, food, energy — is the best way for investors to diversify.”
INTERVENTION WATCH
A late-breaking US CPI report and rising inflation expectations have markets confident that the Federal Reserve will hike rates by 75 basis points next month, and likely by the same amount again in December.
With a variety of Fed policymakers speaking this week, there will be plenty of opportunity for aggressive headlines. The earnings season also continues with reports from Tesla (TSLA.O), Netflix (NFLX.O) and Johnson & Johnson (JNJ.N), among others.
Analysts now expect earnings for S&P 500 companies to have risen just 3.6% year over year, much less than the 11.1% increase expected in early July, according to data from Refinitiv IBES.
Goldman Sachs (GS.N) is also reporting this week and The Wall Street Journal reported that the investment bank plans to restructure its largest companies.
In China, Congress is expected to grant Xi a third term, while there could be a reshuffle of top economic positions as incumbents near retirement age or the term limit.
“Investors haven’t fully digested that China will no longer be a high-growth economy,” said Janus Henderson, emerging markets portfolio manager Ales Koutny, who also expects the yuan to fall further. “There’s not going to be 5-6% growth a year, it’s going to be 2-3%.”
The dollar remains king in FX markets as investors price in US interest rates around 5%.
The yen was hit particularly hard as the Bank of Japan maintained its super-loose policy while the authorities refrained from intervening last week, even as the dollar surged past 148.00 to a 32-year high.
Early Monday, the dollar rose to 148.76 yen and headed for the next target at 150.00.
The euro stayed at $0.9733 after stabilizing last week, while the US dollar index fell a fraction to 113.20.
The rise in the dollar and global bond yields weighed on gold, which was stuck at $1,648 an ounce.
Oil prices tried to rebound after falling more than 6% last week as fears of weakening demand outweighed OPEC’s plans to cut production.
Brent is up 90 cents at $92.55 a barrel, while US crude is up 84 cents at $86.45 a barrel.
($1 = 0.8892 pounds)
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Reporting by Marc Jones; Additional reporting by Wayne Cole in Sydney; Editing by Susan Fenton and Alison Williams
Our standards: The Thomson Reuters Trust Principles.
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