UK markets are making more reversals than the government these days.
Benchmark bonds slid as Prime Minister Liz Truss confirmed she will U-turn on a planned freeze on corporation tax, after having earlier been heading for the biggest weekly rally in a decade. The pound slumped in an reversal of a surge on Thursday, when speculation swirled of tax changes.
“While Truss largely confirmed the market expectations, there is not much new detail compared to what has been already leaked in the press,” said Valentin Marinov, currency strategist at Credit Agricole. “The risk for PM Truss is that her latest concessions will only embolden the markets as they push for a complete dismantling of the government’s pro-growth agenda.”
The moves cap another tumultuous week in the UK’s markets, with historic moves in debt and the pound yo-yoing on changing sentiment. Traders have been looking to the government to adjust its fiscal plans as the Bank of England’s bond-buying intervention in the gilt market ended Friday.
Markets are now assessing whether the changes will be enough to put the UK’s debt on a sustainable footing, given some unfunded tax cuts are still going ahead. Truss has replaced Kwasi Kwarteng as Chancellor with Jeremy Hunt, who she said shares her “desire for a high-growth, low-tax economy,” leaving traders also speculating over how long she can last.
It’s “definitely a statement to calm markets -- nice to see it but doesn’t change the fundamentals all too much,” said Jordan Rochester, a currency strategist at Nomura. “I can imagine this buys Liz Truss a few days -- but if polling remains where it is then it’s the same story, just a delay in the inevitable.”
Bonds have faced turmoil since Kwarteng’s late September mini-budget called for borrowing-fueled tax cuts, which saw voter support for the ruling party collapse in polls, lenders pull mortgage products and an intervention from the BOE to shore up confidence.
The central bank has been buying longer-dated and index-linked gilts to help pension funds facing margin calls in the selloff. After record purchases on Thursday that helped support bond market gains, it bought £1.45 billion (€1.67 billion) on Friday. Ten-year yields were up 13 basis points at 4.33 per cent in late London trading, after swinging from a drop of 30 basis points earlier.
The pound traded 1 per cent lower at $1.1214 against a stronger dollar, trimming gains garnered Thursday. It’s still the best performing major currency this week in a rally spurred by speculation the government would have to change course. -- Bloomberg
