Today's Markets: BoE intervening again and again

All part of a cunning plan? Unfortunately not, Baldrick. The Bank of England today widened its gilt market intervention to counter what it says is a “material risk to UK financial stability”. The BoE will now include index-linked gilts in the basket of assets it purchases as part of the intervention launched in the wake of the chancellor’s mini-Budget.  

“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the bank warned. Ouch... and to think it’s all to do with dollar strength and absolutely nothing to do with a gung-ho chancellor blowing a hole in the UK’s fiscal credibility…

It comes after another selloff in UK debt markets, particularly in the index-linked market. And it comes only a day after the Bank said it would double the size of the daily envelope from £5bn to £10bn and launched a new short-term facility to backstop markets – this move seems to have been ignored by the market as the 30-yr hit 4.8 per cent. There was even more damage done in the index-linked market – today sees a £900m auction of linkers that the Bank is clearly worried about.

It all seems rather messy and panicky – as expected the market was always going to retest the Bank’s resolve and put the Budget to the sword. To expand your emergency intervention in the market once is unfortunate, to do so twice looks like carelessness. Friday probably won’t be the last day of the Bank’s intervention in the gilt market – you’d think it will need to continue right up until either something really breaks and it gives up, or the chancellor reveals his cunning plan to restore order… Time-limited central bank backstops are not prone to succeeding in the long run. Usually, the market waits for the intervention to end before retesting the limits. Markets are like toddlers – always testing the boundaries, wildly overreacting and usually working to cause maximum mayhem at the most inconvenient times. Gilts trade a tad firmer after a steep selloff yesterday, but you wonder how long it holds.  

Meanwhile, the chancellor – not as cunning as a fox who’s just been appointed professor of cunning at Oxford University - is bringing forward OBR forecasts and details of his debt-cutting plan to October 31st... cue plenty of Halloween horror show puns for headline writers and commentators alike. The truth is markets have already been spooked – the task in three weeks is to restore calm. 

Bringing it forward to before the next Bank of England decision is sensible. It will be a very important event for the gilt market in particular – as we have discussed - and the Bank could do with knowing what the chancellor is up to before it decides on just how much it needs to raise rates. A credible plan from the chancellor would do a lot to assuage worries in the bond market and could help push yields back down. Credible plan and a thumbs up from the market = lower yields and less hiking by the BoE = less pain for many. The risk is that is that the plan doesn’t look terribly credible and the market balks at the whole thing and yields break out again. In short, there is a lot hanging on this event on October 31st. Meanwhile UK unemployment fell to a 40-year low; unfortunately due to rising economic inactivity among older people not due to a booming labour market, underscoring the problems facing the economy still further. 

Pivot pushed out

Finally, are central banks in Hotel California?  The market permabulls who are clinging to the idea of a pivot seem to believe so. CBs cannot leave easy money policies even if they choose to check out....(“You can check out any time you like, but you can never leave”). Now I am by no means the first to draw comparisons between the Eagles’ song and the predicament of exiting super-loose monetary policy. All central banks missed their chance to leave and were ‘livin’ it up’ for far too long. Now they really are checking out – and we are about to find out whether they can leave, too. FWIW I think they can leave; those hoping for a pivot might find they themselves in Heartbreak Hotel instead. 

Sterling trades pretty steady at $1.10 this morning without too much fallout from the gilt market shenanigans. EURUSD is holding 0.97. Stocks fell on Wall Street yesterday with the Nasdaq Composite dropping to lowest in two years. E-minis futures are testing last week’s lows this morning.  The FTSE 100 trades about three-quarters of a percent lower around 6,900.

Neil Wilson is the Chief Market Analyst at markets.com