Deep UK tax cuts deepen sell-off, dollar soars and bonds plunge

Join now for FREE unlimited access to Reuters.com

  • MSCI All-World hits 2-year low
  • The dollar hits a new high in two decades
  • Pound, gilts sell off after UK ‘mini-budget’
  • Yen down but traders wary of more intervention
  • Treasuries head for eighth weekly loss

LONDON, Sept 23 (Reuters) – Stocks hit a two-year low on Friday, the dollar hit a two-decade high and bonds sold off again as investors feared bigger gains interest rates are on track to bring inflation under control, while UK assets have plunged after huge debt-funded tax cuts were announced.

British assets were already weaker but extended their slide after Britain’s new finance minister unveiled a landmark tax cut package that will see government borrowing soar. UK bond yields were set to see their biggest daily rise in decades, and money markets were pricing Bank of England interest rates up to 5% by May next year. The pound lost 2%. Read more

The mood in the markets was sour all week, with major central banks making further rate hikes of 350 basis points to fight inflation, Japan stepping in to support the yen and gloomy data from the purchasing managers’ index on Friday indicating a growing slowdown in major economies. Read more

Join now for FREE unlimited access to Reuters.com

Rates were hiked in the US, Britain, Sweden, Switzerland and Norway – among others – but this is the signal from the Federal Reserve that it expects US rates highs last until 2023 which triggered the last selloff.

The MSCI Global Equity Index (.MIWD00000PUS) fell to its lowest level since mid-2020 on Friday, having fallen about 12% in about a month since Fed Chairman Jerome Powell made it clear that lower inflation would hurt.

The euro fell for a fourth straight day after data showed the slowdown in Germany’s economy worsened in September as consumers and businesses grapple with an unprecedented energy crisis and inflation spiral. Read more

European stocks were a sea of ​​red for a second day, under pressure from losses in everything from banks to natural resources and tech stocks.

The pan-regional STOXX 600 (.STOXX) fell around 2.2%, while the Frankfurt DAX (.GDAXI) lost 1.94%, ranking it as one of the worst performing indices in Europe.

“Virtually everything other than inflation data and central bank policy decisions is just noise at the moment, with the market focusing firmly, and almost solely, on how high rates will rise on developed markets and how long they will remain at these highs,” he added. Michael Brown, chief strategist of Caxton FX, said.

S&P emini futures fell 1.15%, suggesting a weaker start on Wall Street later.

London’s FTSE (.FTSE) lost 1.9%, amid the pound falling 2% to another 37-year low and as low as $1.1022 at one point. The cost of insuring UK debt against default also jumped.

Cost of insuring UK debt against default soars

“Generally, looser fiscal policy and tighter monetary policy are a positive mix for a currency – if it can be funded with confidence,” said Chris Turner, global head of markets at ING:

“Here’s the catch – investors are having doubts about the UK’s ability to finance this package, hence the underperformance of gilts.”

KING DOLLAR

As U.S. rates were expected to rise faster and stay high longer, the dollar hit a two-decade high and extended double-digit gains for the year against multiple currencies. The Swedish krona, sensitive to the mood of global investors, fell several times against the dollar this week to its weakest level since at least the early 1970s, according to Refinitiv data.

King dollar reigns supreme

Yields on benchmark 10-year U.S. Treasuries have soared as investors shed inflation-sensitive assets like bonds.

The 10-year yield rose 5 basis points to 3.776%, another 11.5-year high and on course for its eighth straight weekly increase.

Eurozone bond yields also rose sharply, with the Italian 10-year rising to 4.294%, its highest since late 2013, ahead of Sunday’s Italian elections.

The euro marked another 20-year low, plunging as low as $0.9736.

The Japanese yen fell sharply on Thursday until Japanese authorities stepped in to buy the currency for the first time since 1998 and halt its long slide. Read more

On Friday, the yen gave up some of its gains, with the dollar up 0.4% to 142.97 yen to the dollar. Few believe the yen’s rally will sustain given the dovishness of the Bank of Japan.

Gold, which earns no interest, came under pressure, particularly during this quarter, as yields rose. It was last down 1.55% on the day around $1,644 an ounce, its lowest level in two years.

Join now for FREE unlimited access to Reuters.com

Additional reporting by Tom Westbrook in Sydney and Joice Alves in London Editing by Kim Coghill, Kirsten Donovan

Our standards: The Thomson Reuters Trust Principles.

About Emilie Brandow

Check Also

Trigon Terminals Set to Nearly Double Terminal Capacity and Advance Green Diversification with New Federal Funding

PRINCE RUPERT, BC, November 16, 2022 /CNW/ – Prince Rupert Trigon Pacific Terminals Limited (Trigon) …