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Take Five: A bumpy home stretch

Markets
By Sydney Barrett
Reuters

  1. PMN business

A tumultuous year for financial markets is nearing the home stretch as Britain grapples with a self-inflicted crisis and markets flock to US jobs data to gauge just how much the Fed’s rate hikes are affecting the US economy.

Currencies falling to multi-year lows in Australia and New Zealand are increasing the pressure on policymakers there, and incumbent Jair Bolsonaro’s strong performance in Brazil’s elections will see the country head for a second round later this month.

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Here’s a look at the markets ahead of the week from Kevin Buckland in Tokyo, Ira Iosebashvili in New York and Dhara Ranasinghe, Marc Jones and Karin Strohecker in London. Graphics by Vincent Flasseur and Sumanta Sen.

1/ KAMI-KASI?

Britain’s Prime Minister Liz Truss’s government was forced into a humiliating about-face on Monday, reversing plans to cut the top income tax rate that had helped spark rebellion in her party and turmoil in financial markets.

The news in short

raised the pound

although this is very unlikely to end the pressure on UK financial markets.

Britain is at the center of an economic firestorm sparked by Kwarteng’s September 23 fiscal plan that spooked markets with its unfunded tax cuts. Sterling hit record lows and rising bond yields forced the Bank of England (BoE) to step in to stem a market crisis.

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The BoE’s pledge to buy $69 billion worth of long-dated gilts has calmed markets for now, but it’s too early to say the crisis is over. And buying bonds at a time when the BoE is raising rates to curb inflation could damage its credibility.

Among other things, the IMF has taken into account the events in the United Kingdom and their global implications. This keeps Kwarteng in the limelight.

2/ WORK OF LOVE

US payroll data for October 7th will show if the Fed’s rate hike freeze is finally having an impact.

Earlier jobs data suggested the economy was humming along despite several jumbo-sized rate hikes – evidence usually corroborated by strong inflation readings a few weeks later.

Another report of this kind in September could help bolster the case for an even more hawkish stance from the world’s top central bank, which may already be baiting markets for the worst inflation in forty-five years with concerns about how high interest rates could soar years to tame, could cause an uproar. Conversely, signs of rapidly deteriorating job growth could fuel concerns that the Fed’s aggressive tightening is pushing the economy into recession.

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Economists polled by Reuters expect the United States to have added 250,000 jobs last month.

3/ DOWN UNDER FALLING

Antipodean currencies’ freefall to multi-year lows is increasing pressure on central banks to tighten policy.

For the Reserve Bank of Australia, the bets are fifty-fifty for a half-point or quarter-point raise on Tuesday. Traders are fully pricing in another half-point rate hike by the Reserve Bank of New Zealand on Wednesday, setting 1-in-5 odds for a 75 basis point hike.

New Zealand was the first out of the gate among developed markets a year ago, while Australia delivered one of the most aggressive campaigns in its history.

But accelerating monetary tightening elsewhere, particularly in the United States, has hurt the yield advantage. With the Aussie and Kiwi both overly sensitive to swings in risk sentiment, policymakers may have little ability to stem the slide.

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4/ THE BOYS FROM BRAZIL

After right-wing President Jair Bolsonaro, the second round of the Brazilian presidential election campaign begins

surpassed polls

and robbed left-wing former President Luiz Inacio Lula da Silva of an overall victory in Sunday’s first round of voting.

Bolsonaro’s unexpectedly strong showing on Sunday has dashed hopes of a quick resolution to deeply polarized elections in the world’s fourth-largest democracy.

Politics in the region can be feverish. An assassination attempt in Argentina and electoral violence in Brazil are the latest signs of growing political unrest. Investors are looking for a quiet transition while Bolsonaro lays the groundwork to contest defeat, but Brazilian institutions have banded together to ensure the integrity of the vote.

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5/ BUCKLE YOUR BELT IN

The last few months have rained even more pain on the financial markets, meaning this year is firmly on course to be the most painful of all times for those lucky enough to not have lived through World War II, unless, they had all their chips bet on the king dollar.

Free and loose central banks have turned into anti-inflation engines. Since June, global equities have shed another 5%, oil has fallen more than 20% and both Japan and the UK have been forced into FX or bond intervention.

Whether the coming months will get better is not an easy question. While there are some signs that global inflation may be peaking, major central banks appear stuck in the hamster wheel of rate hikes. Geopolitics will remain high on the agenda, with the Chinese Communist Party Congress set to begin in October, while Russia’s nuclear threats and Ukraine’s annexation of territory mark the start of a new phase in the seven-month-old conflict.

(Compiled by Karin Strohecker, Editing by Mark Potter and Toby Chopra)

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