LONDON (Reuters) -Britain’s pound plunged to record lows on Monday and bonds were slammed for a second day, as investors punished UK assets after the government’s mini-budget announcement last week.
On Friday, finance minister Kwasi Kwarteng announced he was scrapping the country’s top rate of income tax and cancelled a planned rise in corporate taxes – all on top of a hugely expensive plan to subsidise energy bills for households and businesses.
British government bond yields ripped higher in response, rising by the most in a single day in decades on Friday, as investors ditched gilts, while London-listed blue chips hit their lowest since early March.
Kwarteng on Sunday dismissed the freefall in the pound, saying his strategy was to focus more on longer-term growth and not short-term market reaction.
In Asian trading on Monday, the pound fell by as much as 5% against the dollar at one point to a low of $1.0327, its weakest at least since the introduction of decimalisation in the early 1970s.
MARKET REACTION:
FOREX: Against the dollar, sterling was last down 1.1% at $1.0735, while against the euro, the pound was down 1.2% at 90.40 pence.
STOCKS: The FTSE 100 rose 0.5% in early trade on Monday, while the mid-cap FTSE 250 shed 0.7%.
BONDS: Two-year gilt yields were last up 43 basis points at 4.42%, while 10-year yields rose 28 basis points to 4.11%
COMMENTS:
SAMY CHAAR CHIEF ECONOMIST, LOMBARD ODIER, GENEVA:
“This doesn’t feel like a currency crisis, where the decline in a currency worsens the situation. Sterling needs to decline considering the deficits and the uncertainty around what the Bank of England will do, but at some point, it will fall to a level where the attractive return prospects it creates improves the prospects of economic and financial flows.”
MICHAEL EVERY, STRATEGIST, RABOBANK SINGAPORE
“The British have decided that going back to the 1980s on steroids is the best way to go, and clearly the market is just saying: ‘That’s not going to work,’ on steroids.
“The market is now treating the UK as if it’s an emerging market. And they’re not wrong in terms of the policy response and the naivety of thinking that boosting demand rather than supply is how you deal with a supply-side shock.”
SHAFALI SACHDEV, HEAD OF FIXED INCOME AND COMMODITIES, ASIA, BNP PARIBAS WEALTH MANAGEMENT, SINGAPORE
“It’s quite interesting that you see a G10 currency weakening into a hike expectation. That makes you realise that the market is not very confident about the ability of the UK government to be able to fund their fiscal plans.
“The math of it would imply that something needs to give, whether it’s terms of higher rates, or a weaker pound. And I guess the market is taking a very calculated bet that that is going to be the case.”
PAUL MACKEL, GLOBAL HEAD OF FX RESEARCH, HSBC, HONG KONG
“The movements over the last couple of trading days are quite fierce.
“Normally you would think about a very strong fiscal package raising interest rate expectations should be positive for a currency, but this time around we’re not seeing that. We’re seeing the exact opposite.
“What has happened in the last 48 hours or so, it’s a strong reminder about how suddenly the drivers for exchange rates can change.”
KIT JUCKES, HEAD OF CUFRRENCY STRATEGY, SOCIETE GENERALE, LONDON
“Markets have a tendency to overshoot and I wouldn’t overinterpret the fall this morning.
“But there are two points. One is the loss of confidence in UK fiscal policy and that won’t help sterling. The second is that the mini-budget has allowed sterling to be the short of choice against the dollar.”
LEE HARDMAN, CURRENCY ANALYST, MUFG, LONDON
“The outsized market reaction to the UK government’s fiscal stimulus plans send a clear signal that market participants have lost confidence in the appropriateness of domestic policy settings in the UK.”
PAUL DALES, CHIEF UK ECONOMIST, CAPITAL ECONOMICS, LONDON
“The further fall in the pound in early trading mean that we’ve now reached the point where the Bank of England needs to step in in order to regain the initiative. There are a couple of ways it could do this.”
“First, Governor Bailey could come out this morning emphasising the Bank’s commitment to the 2% inflation target and providing a clear signal that it intends to raise interest rates aggressively at the next policy meeting in early November.”
“If this were coordinated with a message from the government that it is committed to long-term fiscal discipline and will bring forward plans to spell out how it intends to keep the public debt position stable following last week’s fiscal splurge, then it could relieve some downward pressure on the pound.”
(Reporting by London Markets Team; Editing by Karin Strohecker and Alex Richardson)
