- Markets remain febrile
- Bank of England intervention effect begins to wane
- What happens next? Will the government or the Bank blink first as markets test them?
I have rarely seen sentiment so bad: ‘we’re doomed, doomed!’ seems to be the prevailing mood across the markets. The good news is that this is the kind of thing we need to get to the moment of capitulation when everyone throws in the towel and the market bottoms. The bad news is what happens until then and what damage is done to markets and people’s finances in the process. UK bond markets are a case in point – and no one is terribly sure what happens next; fiscal policy and monetary policy are both incredibly uncertain. The salve administered by the Bank of England yesterday is already wearing off – 30yr gilt yields jumped this morning. Markets like to test the limits. You can’t fight the Fed and you can’t fight the tape: the BoE and HMT are no different to anyone else.
The Bank of England shouted ‘don’t panic!’ as it weighed in with a £65bn stimulus package to shore up the gilt market. It soothed market angst and keeps the wheels moving, but it does not solve the underlying problem. The Bank moved to stop contagion, but stress remains and it remains the case that it must tighten policy faster to offset the effects of the Budget – gilt yields are not back to pre-Budget levels and the path of least resistance without further intervention is up. It amounts to a split personality – easing on end, tightening on the other. The Bank says it’s temporary, but we cannot know for sure when market confidence will return and whether the Bank will be called upon to do more, further taking it away from its inflation-busting, rate-hiking agenda.
Bond market panic subsided. The yield on UK 30yr gilts, where the Bank’s easing was targeted, returned to below 4 per cent from above 5 per cent, a 20-year high. Sterling on the whole looks pretty stable with GBPUSD hovering around 1.08 - the currency took the brunt on Monday, but the worst of the market trouble has been in the bond market since. Stocks rebounded as the Bank stepped in, the FTSE erasing losses of as much as 2 per cent to end the day up 0.3 per cent, clinging to the 7,000 level. European markets also rebounded, and the US rallied handsomely, with the S&P rising 2 per cent to recover 3,700 by the close.
The positive vibes have not extended into this morning’s session – the FTSE 100 is down over 2 per cent in early trading, with similar moves seen in other European bourses. The FTSE 250 is off by 2.35 per cent, its weakest in two years at 16,906. Sterling retreated from the 1.09 area hit yesterday to under 1.08 as PM Liz Truss did the rounds on local radio to defend her economic plan - stability is a relative thing now.
The question facing the UK government is what happens next – the fate of the Truss regime seems to hinge on what the market does. And once governments or central banks go toe-to-toe with the markets, things can become unstuck pretty fast. 30yr gilt yields ticked higher to 4.15 per cent from 3.93 per cent – I fear the market is going to test the resolve of the Bank of England and it’s quickly going to find itself in a far bigger mess and needing to deliver far sterner measures. If it is doing QE then it just makes inflation worse, if it’s not then it’s tightening – either way markets are unhappy – the lack of a plan or credibility is what matters. And it’s entirely of the government’s making: you stupid boy, Kwasi. Someone ought to have said do you think that’s wise, sir? Insiders claim they did, and the sacking of the top civil servant suggests Kwarteng didn’t care for anyone else's advice anyway.
Tumultuous times in the markets. We’ve not seen bond markets in such a state of flux for many years. Stocks are hovering around 2-year lows and the dollar moves serenely on, crashing everything in its path. Albeit, the recovery in risk assets yesterday following the Bank of England’s move sent the dollar sharply lower. The dollar is on the ascendancy again this morning. In Dad’s Army they tended to muddle through somehow – let’s hope it’s same in real life. But would you mind awfully I were excused?
Neil Wilson is the Chief Market Analyst at markets.com
