October 5, 2022

Markets hate Liz Truss’ plan for the UK. Just look at these charts

2 min read

British pound It fell below $1.10 by mid-afternoon, hitting a 37-year low against the greenback.

UK government bonds also sold sharply. The yield on the benchmark 10-year UK government bond, which moves against prices, rose by a quarter of a percentage point – a huge move in the world of bond trading. This increased borrowing costs. UK stocks, as measured by FTSE 100 (UK X) In London, it fell to its lowest level since March.

Finance Minister Kwasi Kwarteng said the government would cut personal income tax and cancel plans to raise business taxes next spring, calling for a “new vision for a new era, a focus on growth”. . At the same time, he promised to press ahead with plans to subsidize energy bills for millions of households and businesses.

But investors are not convinced that the unconventional approach will actually help the economy, which the Bank of England warned this week was already headed for recession. One of them called it a huge gamble.

“It’s highly unusual for a developed market currency to weaken at the same time as yields are rising. But, that’s exactly what happened. [Kwarteng’s] announcement,” Deutsche Bank strategist George Saravelos said in a note to clients on Friday.

Moving towards parity with the dollar?

One concern is that it would require a substantial increase in government borrowing at a time when interest rates are rising rapidly. The Bank of England on Thursday raised its key rate to that. The highest level since 2008. It was the central bank’s seventh rate hike since December.

As well as being politically popular, cutting taxes can also increase demand and raise prices, making the central bank’s job of keeping inflation under control more difficult.

Analysts warned that the pound and British bonds were likely to fall further.

Some even speculated that the currency could reach parity against the dollar for the first time in its history. (Its previous all-time low was just above $1.05 in 1985). The greenback’s disastrous rally is adding to downward pressure after the Federal Reserve took aggressive steps to rein in inflation.

“Unless something can be done to address these fiscal concerns, or the economy shows surprisingly strong growth figures, it looks like investors will stay away from sterling,” said Antoine at ING. Bouvet and Chris Turner said in a research note. “We think the market is underestimating the potential for parity.”

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