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Rally in stocks and sterling after UK tax cut gives some reassurance

Rally in stocks and sterling after UK tax cut gives some reassurance
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  • UK scraps small part of tax plan; markets facilitated
  • The Reserve Bank of Australia surprises with a small hike
  • A high VIX indicates more volatility

LONDON/SYDNEY, Oct 4 (Reuters) – Global stocks rose for a second day on Tuesday after Britain’s decision to scrap part of a controversial tax cut plan and somewhat dimmer expectations of aggressive central bank action restored some confidence to investors .

British Finance Minister Kwasi Kwarteng announced on Monday that the government would back down Reversal of a tax break for top earners which were part of a package to boost growth.

This measure represents only a small part of the £45 billion in unfunded tax cuts that have sent the pound to record lows and wreaked havoc on the gilts market.

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But it was enough to ease some of the market’s recent fears and together with the Bank of England’s bond purchases, sterling should erase most of the losses recorded since the mini-budget unveiling on 14-23.

Adding to the sense of relief among investors who experienced one of the most volatile quarters in recent history in the three months to September Australia’s Central Bank, which raised rates far less than expected. .

A weaker result from US manufacturing activity helped dampen expectations for stronger rate hikes by the Federal Reserve.

However, some analysts said that optimism may be misplaced.

“However, my firm opinion is that this will not be the case. Although the Fed technically has a dual mandate, it has effectively become a single-issue central bank; that problem is getting inflation back to the 2% target,” said Michael Brown, Chief Strategist at CaxtonFX.

“Unless inflation data improves for a few straight months, it’s difficult to envisage any sort of tipping point, with a further 75 basis point hike remaining my base case for next month’s decision. It’s difficult to take a long risk when that’s on the radar.”

The MSCI All World Index (.MIWD00000PUS) was up 0.8% on the day as stocks in Europe, including the Stoxx 600, enjoyed a decent rebound (.STOXX) Trading almost 2% higher and London’s FTSE (.FTSE) gain over 1%.

The pound, meanwhile, gained 0.6% against the dollar to trade at $1.1390. The pound sterling is up more than 10% since the mini-budget.

The dollar slipped against a basket of major currencies as the euro and pound rallied and US Treasury yields fell amid a shift in investor expectations about the direction of US interest rates.

US 10-year benchmark yields fell nearly 20 basis points on Monday after topping 4.0% just last week. They were last down 7 basis points to 3.5795%.

“Notably, this move lower was entirely due to a decline in real yields, with inflation breakevens edging higher on the day, again a sign that investors are pricing in a much less aggressive response from the Fed,” said Jim Reid, strategist at the Fed Deutsche Bank said in a daily note.

Trading thinned by public holidays in China and Hong Kong, MSCI’s broadest index of Asia Pacific equities outside of Japan (.MIAPJ0000PUS) rose 1.7% led by gains in Australia.

ENJOY IT WHILE IT LASTS

After September, when global bonds experienced one of the biggest selloffs in decades and every currency other than the dollar seemed to be crumbling, market watchers said a pullback, helped by better sentiment in the UK market, was not unusual but likely to be short-lived .

“The reversal…will not, in our view, have a major impact on the overall budgetary position in the UK,” said John Briggs, head of economic and market strategy at NatWest Markets.

“(But) investors took it as a signal that the UK government is at least partially ready to back down from the intentions that have so disrupted markets over the past week.”

S&P 500 futures rose 1% after the index rose 2.6% (.SPX) overnight, suggesting a second day of gains could lie ahead for Wall Street later.

Other market stress indicators are still flashing red. The CBOE Volatility Index (.VIX) remains elevated and above 30th shares (CSGN.S) and Credit Suisse bonds reached record lows on Monday as concerns over the bank’s restructuring plans swept markets, although some of those losses were reversed on Tuesday.

The Japanese yen hit 145 against the dollar on Monday – a level that prompted official intervention last week – and was last seen at 144.65, while the euro rose 0.6% to $0.9878, about three cents higher last week’s 20-year low.

“More volatility is almost certain as FX markets refocus on US recession risks that continue to build,” said ANZ senior economist Miles Workman, with Friday’s US jobs data the next key data point on the horizon.

Oil posted gains overnight on news of possible production cuts and Brent futures were last up 43 cents at $89.29 a barrel.

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Edited by Sam Holmes and David Evans

Our standards: The Thomson Reuters Trust Principles.

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