UK gilts, pound and stocks rally on expected U-turn on fiscal plans

Article content

LONDON — Long-dated British government bonds, the pound and shares all rallied on Monday ahead of a statement from new finance minister Jeremy Hunt who is expected to reverse swathes of Prime Minister Liz Truss’s economic growth plan which triggered a market rout.

Yields on 20- and 30-year gilts slid by around 34 basis points in early trade, reversing most of their sharp rises seen on Friday when a statement by Truss failed to reassure investors about the government’s fiscal plans.

Article content

Article content

The pound, which had also fallen on Friday, rose 0.7% against the dollar to $1.1258 and gained on the euro , while Britain’s domestically-focused FTSE250 outperformed European peers and gained 0.63%.

Hunt will announce tax and spending measures on Monday, two weeks earlier than scheduled, to stem a collapse in investor confidence that began when Truss’s government unveiled a push for economic growth based on unfunded tax cuts last month.

“The message is that they’re clearly trying to repair some fiscal stability,” said Kenneth Broux, senior currency strategist at Societe Generale.

“From a market perspective that makes complete sense, hence why we’re seeing yields collapse and why sterling is bid.”

“Obviously, they have to reverse everything that happened in the last three weeks, and the question is how long that takes, and whether that requires the removal of the Prime Minister.”

Article content

MARKET VOLATILITY

While in historic terms a 34 basis-point fall in yields would represent a huge rally for gilts, on Monday it only put them back to a levels seen last week – a reflection of the enormous market volatility recently.

Gilt yields remain well above the levels seen before former finance minister Kwasi Kwarteng announced Truss’s growth agenda on Sept. 23 – a measure of the deficit in investor confidence that Hunt must now address.

The 20-year gilt yield was about 71 basis points higher on Monday than its closing level on Sept. 22, the day before the announcement of the “Growth Plan,” leaving it closer to its recent peak than its pre-plan level.

“It would take an almighty fiscal tightening package to convince the market that a) the fiscal path is now sustainable and b) that Bank of England hiking risk is reduced,” said Antoine Bouvet, rates strategist at ING.

Article content

Rate futures priced in a roughly 80% chance that the BoE will raise interest rates by 100 bps to 3.25% on Nov. 3, having priced in a smaller increase to 3.0% at the end of last week.

BoE Governor Andrew Bailey said on Saturday: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

While the pound was roughly back to where it was before Kwarteng’s mini budget, it remains highly volatile with moves in sterling and British yields driving moves in other currencies and government bond markets around the world.

Speculators increased their exposure to the pound by a fifth in the latest week – the most in two months, according to data from the Commodity Futures Trading Commission.

Investors such as hedge funds added to their bullish bets on sterling for the first time since late September. (Reporting by Andy Bruce and Alun John, Editing by William Schomberg and Ed Osmond)