Today's Markets: Hunt torches Trussonomics

Brand new Chancellor of Exchequer Jeremy Hunt says salami slicing measures to row back the Budget cock-up just aren’t working; he wants to deliver the full sausage and hope the markets like it. So it was at 11am, in a televised message rather than a press conference, that Hunt took a match to pretty much everything his predecessor Kwasi Kwarteng had announced as recently as 23 September. Gone is the income tax reduction, perhaps 'indefinitely', the corporation tax increase to 25 per cent is reinstated, so too the dividend tax cut, and the energy support package has been scaled back to only provide universal support until April after which a more targeted package is likely to be introduced. 

Hunt has gone further than expected to shore up market confidence, but it’s still a mess – economic policy cannot be made up on the hoof like this and retain any kind of credibility. The weaknesses in the underlying economy remain. And the damage done by the mini-Budget has not been undone – even undoing all the changes has left gilt yields materially higher than they were before the Budget – the damage is not just unpicked lightly by reversing most the changes.

Market reaction has been initially positive with sterling higher and calm in the gilt market but the political ramifications are huge and might induce further instability – Truss cannot survive this. Hunt is now in charge of the ship. 

Meanwhile the Bank of England said it intends to resume sales of corporate bonds in the week of 24 October. 

Gilts didn’t move much on the actual statement by Hunt– mainly priced – but are still close to 40bps down on the day. Sterling rallied to $1.1330 just as Hunt was about to speak before retracing to $1.1270 again. 

Following the moves last week and the sacking of the previous chancellor the UK government is embarking on a burst of activity designed to shore up market confidence. I would question whether credibility can be restored all that quickly – investors don’t want uncertainty – and I would have a general working assumption that the market will seek to test resolve again by pressing on the gilt market. In a world of declining liquidity and a loss of confidence in institutions, markets tend to seek to inflict maximum pain to the greatest number of market participants. 

The market seems to have lost faith and you won’t now get it back easily - completely rowing back every measure makes you look weak and incompetent…rather than headstrong and incompetent. As noted last week there are no good options for Truss. And we should note that underlying economic problems that are weighing on the pound remain – inflation, twin deficits, no productivity growth. Goldman Sach's downgrade to GDP outlook for UK references rise in corporation tax as reason – damned if you do, damned if you don’t.

Fed pivot? Nope, but the Treasury has asked big banks if it should start repurchasing US government debt to improve liquidity. Not a huge reaction in the market to this but watch this space...Treasury preparing for major dysfunction in Treasuries markets?

Equities

European stock markets are trading a bit firmer this morning but hardly with much conviction – eyes on the Chancellor’s statement for the steer. The Dow closed Friday down by 400pts by finished the week higher. The S&P 500 declined by 1.55 per cent for the week, whilst the Nasdaq declined 3 per cent. US futures are calling for a stronger open on Wall Street later. Brent weaker at $90 with the top of the channel now acting as support.

Couple of bits of commentary: BofA: "In addition at the Big Low, everyone expects the Fed to cut… just ain't the case today; market so oversold & investors so cashed-up = decent counter-rally, but ultimate lows ain't seen yet" 

Barclays: “Defensive positioning and uber bearish sentiment can help stocks to bounce from oversold levels, suggesting a lot of bad news is priced in. But we think growth and policy fundamentals continue to argue against a sustained rally.” 

Today: Chancellor statement at 11am, then House of Commons statement at 3pm. In Europe the German Buba report is due at 11am. US: Empire State mfg index.

Neil Wilson is chief market analyst at Markets.com