December 9, 2022

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Europe rallies while UK volatility calms nerves

Europe rallies while UK volatility calms nerves

  • European Markets Gain With UK Moves Helping Sterling, Gold
  • The Nikkei fell 1.2%, the S&P 500 rose after pulling back
  • The dollar is near 149 yen, and the market is wary of intervention
  • Chinese yuan falls after Xi’s speech in Congress

LONDON (Reuters) – Shares, bonds and major currencies in Europe rose on Monday, buoyed by relief that Britain’s new finance minister quickly tore up nearly all of the unfunded tax cuts that have disrupted the British market this month.

The major stock exchanges in Asia suffered overnight but the European Stoxx 600 Index (.stoxx) It made 0.6% and Wall Street futures rose more than 1% with the pound and British government bonds rising in London. / GB / FRX

Britain’s new Chancellor of the Exchequer Jeremy Hunt has announced that he has rolled back “all” of the tax measures introduced by Prime Minister Liz Truss and his predecessor Kwasi Quarting just three weeks ago.

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Bank of England Governor Andrew Bailey Hunt gave a vote of confidence on Saturday, saying they had an “immediate meeting of minds” on the need to reform public finances, with an estimated £70 billion ($78.72 billion) black hole.

In his statement, Hunt said it was “not right to borrow to finance these tax cuts” and that his actions would generate more than £30 billion. John Hardy, head of FX strategy at Saxo Bank, said UK issues will remain a major focus though.

“It’s an attempt to stabilize the sterling and UK bond markets which are going in the right direction,” Hardy said, citing the pound’s rise against both the dollar and the euro as a thumbs-up from the market for Hunt’s moves. .

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“But I think we may have come a long way with the sterling movement… we still don’t have anything to address the structural issues in the UK that led to the weakness in the first place – a huge double deficit that still needs to be funded.”

However, the reactionary rally saw the UK 10-year Treasury yields fall 34 basis points to 3.97%, while the UK’s 30-year Treasury yields fell 38 basis points to 3.78%. . The yields reflect the borrowing costs and move inversely to the price of the bond.

Other European markets also benefited, including the German 10-year bond yield which fell to 2.245% after hitting 2.423% last week, its highest level since August 2011.

It was also despite two key European Central Bank policymakers raising the issue over the weekend to cut the bank’s balance sheet and after Friday’s US inflation data boosted bets for another sharp rate hike from the Federal Reserve next month.

He wrapped

Overnight, MSCI’s broadest index of Asia Pacific shares outside Japan (MIAPJ0000PUS.) It slipped 0.6% and returned back towards last week’s 2-1/2 low.

Japan’s Nikkei Index (.N225) It fell 1.2% despite the Chinese blue chips (.CSI300) It rose 0.4% and there was uncertainty as Beijing took the unusual step of delaying the release of economic indicators, including third-quarter GDP data due on Tuesday.

The postponement comes amid the week-long congress of the ruling Communist Party, a twice-a-decade event that marks a particularly sensitive time in China, where President Xi Jinping is widely expected to win an unprecedented third term of leadership.

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Meanwhile, S&P 500 futures rose more than 1% amid a rally in Europe and after a sharp decline on Wall Street on Friday.

While the S&P is losing sight of 25% from its peak, Bank of America economist Jared Woodard warns that the slide is not over as the world has been transitioning from two decades of 2% inflation to a time similar to 5% inflation.

“$70 trillion in ‘new’ technology, growth, and government assets priced at 2% world is as vulnerable to such secular transformations as ‘old’ industries like energy and materials, reflecting decades of underinvestment,” he wrote in a note.

“Rotating 60/40 agents and buying what is scarce — energy, food, energy — is the best way for investors to diversify.”

intervention hour

A hot US consumer price report and rising inflation expectations have markets fully expecting the Federal Reserve to raise interest rates by 75 basis points next month, and that rate will likely rise again in December.

A large number of Fed policymakers are speaking this week, so there will be plenty of opportunity for hawkish news headlines. Earning season continues with Tesla (TSLA.O)Netflix (NFLX.O) johnson & johnson (JNJ.N) Reports, among others.

Analysts now expect earnings for S&P 500 companies to rise only 3.6% from a year ago, well short of the 11.1% increase expected at the beginning of July, according to Refinitiv IBES data.

Goldman Sachs (GS.N) The Wall Street Journal also reported this week that the investment bank plans to restructure its largest business.

In China, Congress is expected to give Xi a third term, while there may be an adjustment to major economic roles as incumbents approach retirement age or term limits.

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“Investors have not fully understood that China will not be high growth anymore,” said Janus Henderson, emerging markets portfolio manager, Alice Kotney, who also expects the yuan to continue to weaken. “It’s not going to be 5%-6% per year growth, it’s going to be 2%-3%.”

In the currency markets, the dollar is still king as investors’ price in the US has peaked around 5%.

The yen took a particularly hard hit as the Bank of Japan stuck to its ultra-easy policy, while the authorities held back from intervening last week even as the dollar scrambled past the 148.00 level to 32-year highs.

Early on Monday, the dollar rose to 148.76 yen and is heading towards the next target at 150.00.

The euro settled at $0.9733, after achieving a more stable performance last week, while the US dollar index slipped slightly to 113.20.

Rising dollar and global bond yields put pressure on gold, which remained stuck at $1,648 an ounce.

Oil prices have been trying to rebound, having fallen more than 6% last week as worries about slowing demand overshadowed OPEC’s plans to cut production.

Brent settled 90 cents at $92.55 a barrel, while US crude rose 84 cents to $86.45 a barrel.

(dollar = 0.8892 pounds)

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Mark Jones reports. Additional reporting by Wayne Cole in Sydney. Editing by Susan Fenton and Allison Williams

Our criteria: Thomson Reuters Trust Principles.