U.S. equity indexes higher, Nasdaq leads
Cons staples best sector performer, energy lags
Euro STOXX 600 index falls ~0.5%
Crude slips; dollar little changed; gold, bitcoin higher
U.S. 10-Year Treasury yield last ~3.94%
DANCING ON A VOLCANO: THE ERUPTION OF THE UK BOND MARKET (0950 EDT/1350 GMT)
Britain’s financial markets erupted over a raft of proposed tax cuts in late September, with the latest confusion over the timeline of the bank’s emergency bond-buying scheme adding to the chaos.
"This year has been like a volcano - the pressure has been building, and now things are starting to erupt," Stuart Cole, head macroeconomist at Equiti Capital, said in an interview with the Reuters Global Markets Forum.
Earlier, the Financial Times reported that the UK's central bank had signalled privately to lenders that it was prepared to extend the programme beyond this Friday's deadline. That came after Bank of England (BoE) central bank governor Andrew Bailey said he had no intention of an extension.
"The fact that the FT reported private conversations suggesting the intervention would continue beyond Friday, only for Bailey to subsequently say it would not, suggests a lack of joined-up writing at the heart of BoE policy-making," Cole said.
"The issue has gone beyond the problems facing sections of the pensions fund industry and is rapidly becoming a question of the BoE’s credibility and whether it has lost control of the gilt market."
On Wednesday, with markets already considerably spooked by crises far beyond the R-word, fresh data showed Britain's economy unexpectedly shrank in August.
Signs of a recession have been high on investors' radars, and while per traditional metrics, the UK isn’t there yet, the latest figures are one step closer to that reality, analysts say.
"The real worry becomes - if the BoE is forced to intervene again, will it be effective or will it have lost control of the gilt market?" asked Cole, likening the current situation to 'Black Wednesday' in 1992.
What comes next? Finance minister Kwasi Kwarteng's budget plan brought forward to Oct. 31, for one.
"If Kwasi Kwarteng sticks with his current tax cuts, he will need to cut spending by some £60 billion within the next few years to get the fiscal deficit materially falling as a percentage of GDP, which represents about 7-8% of current government spending. A huge ask!” said Cole.
"But the alternative of reversing more of his tax cuts will see his credibility in tatters... Kwasi Kwarteng is doomed."
Moreover, looking abroad, the euro-zone is also in trouble.
"If the ECB is serious about hiking rates to bring CPI back to target within a couple of years, yield divergence problems could re-emerge, with the likes of Italy and Greece once again proving problematic," Cole said.
For the UK, Cole said, 2022 has been a volcanic year, but 2023 doesn't seem like it's likely to look materially better.
(Anisha Sircar)
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COULD WE GET ANOTHER PLAZA ACCORD? CREDIT SUISSE SAYS UNLIKELY ANYTIME SOON (0900 EDT/1300 GMT)
Concerns about the impact of the strong dollar on markets and the global economy have risen in recent months, raising speculation that the United States could intervene to stem greenback strength.
Credit Suisse sees such a move as unlikely in the near term, however, arguing that multiple factors support the dollar’s valuation.
In 1985 five countries, France, Japan, the United Kingdom United States and what was then West Germany, agreed to depreciate the dollar to reduce the U.S. trade deficit, which is known as the Plaza Accord.
But the circumstances around dollar strength are different this time around, Credit Suisse analysts led by Shahab Jalinoos said in a report.
Changes in global terms of trade and energy trade balances this year have been favorable for the greenback, while sharp falls in demand in areas like chips are hurting Asian exporter currencies, the bank said.
“This limits the argument that the USD is overvalued due to hot money flows, and instead suggests it is a natural course of action given trade dynamics.”
Foreign policies including “zero Covid” in China, yield curve control in Japan, more dovish than expected central bank policy in countries such as Australia and energy price subsidies in the UK that will increase trade deficits are also major factors in why the dollar is strong, Credit Suisse said.
“For US policymakers to intervene to weaken the USD in this framework is to, in effect, subsidise the questionable policy choices made in other parts of the world,” Credit Suisse said, adding that it doesn’t expect “US endorsement of FX intervention comes in the immediate future.”
“Rather, we suspect that if global growth risk or market instability becomes overwhelming, the more likely course of action would be either direct intervention in the markets of concern (assuming they are US ones such as credit markets) or instead finally delivering the “Fed pivot” message markets are so keen to see,” the bank said.
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