Europe advances as UK U-turns calm nerves

Europe advances as UK U-turns calm nerves

  • European markets gain as UK measures help sterling and gilts
  • Nikkei down 1.2%, S&P 500 recovers slightly after its fall
  • Dollar close to 149 yen, market wary of intervention
  • Chinese yuan plummets after Xi’s congress speech

LONDON/SYDNEY, Oct 17 (Reuters) – European stock, bond and currency markets rose tentatively on Monday, helped by relief that Britain’s new finance minister quickly implemented the unfunded tax cuts that sparked turbulence on UK assets this month.

Major Asian markets struggled overnight, but Europe’s STOXX 600 (.STOXX) made an early gain of 0.5% as the pound and UK government bonds rallied in London. /GB/FRX

Britain’s new finance minister, Jeremy Hunt, is due to make a statement around 10:00 GMT. He spent much of the weekend holding meetings and doing media interviews signaling that many spending plans by Prime Minister Liz Truss and her predecessor would now be scrapped.

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Bank of England Governor Bailey gave Hunt a vote of confidence on Saturday, saying they had an ‘immediate meeting’ on the need to fix public finances, where there are estimates of a hole black of 70 billion pounds (78.72 billion dollars).

Invesco’s head of macro research, Ben Jones, said UK volatility will remain a key objective for global markets.

“The hope is that Jeremy Hunt is a more stable set of hands,” he said, pointing to the “relief rally” for the pound which rose 0.75% to $1.1257, and on UK gilt markets.

“But we still need to see a sequel…and we still don’t know if Liz Truss will still be here at noon or at the end of the month.”

UK 10-year gilt yields fell 27 basis points to 4.06% in morning trading, while 2-year gilts fell 12 basis points to 3.75%. .

Other European markets also benefited. The yield on the 10-year German Bund fell 9 basis points (bps) to 2.27% after hitting 2.423% last week, its highest since August 2011.

It was also despite two key ECB policymakers pleading over the weekend to shrink the bank’s balance sheet and after Friday’s US inflation data bolstered bets on another aggressive rate hike. of the Federal Reserve.

TURNING

Overnight, MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 0.6% and fell back to last week’s low in 2.5 years.

The Japanese Nikkei (.N225) lost 1.2%, although Chinese blue chips (.CSI300) rose 0.4% ahead of Tuesday’s GDP data.

S&P 500 futures edged up 0.4% after Friday’s sharp decline, while Nasdaq futures added 0.3%.

With the S&P 25% off its peak, BofA economist Jared Woodard has warned the fall is not over as the world moves from two decades of 2% inflation to a period of something like 5% inflation.

“$70 trillion in ‘new’ tech, growth and government bond assets at the price of a 2% world are vulnerable to these secular shifts as ‘old’ industries like energy and materials are increasing, reversing decades of underinvestment,” he wrote in a note.

“Rotating proxies 60/40 and buying what’s scarce – power, food, energy – is the best way for investors to diversify.”

MONITORING OF INTERVENTIONS

A scorching consumer price report in the United States and rising inflation expectations have markets expecting the Federal Reserve to hike rates by 75 basis points next month, and likely by more. same way in December.

A host of Fed policymakers are speaking this week, so there will be plenty of opportunities for hawkish headlines. Earnings season also continues with reports from Tesla (TSLA.O), Netflix (NFLX.O) and Johnson & Johnson (JNJ.N), among others.

Goldman Sachs (GS.N) also reported this week and The Wall Street Journal reported that the investment bank plans to restructure its largest businesses into three divisions.

In China, the Communist Party Congress is expected to grant President Xi Jinping a third term, while there could be a reshuffling of key economic roles as incumbents approach retirement age or term limits.

“Investors haven’t fully understood that China will no longer be a high-growth economy,” said Janus Henderson, emerging markets portfolio manager Ales Koutny, who also expects the yuan to continue falling. . “It will not be a growth of 5 to 6% per year, but of 2 to 3%.”

In the foreign exchange markets, the dollar remains king as investors value US rates peaking at around 5%.

The yen has been particularly hard hit as the Bank of Japan sticks to its easy policy, while the authorities refrained from intervening last week even as the dollar rose above the 148.00 level to reach 32-year highs.

Early Monday, the dollar was up at 148.73 yen and heading towards the next target at 150.00.

The euro was holding at $0.9733, after posting a more stable performance last week, while the US dollar index fell slightly to 113.20.

Rising dollar and global bond yields were a drag on gold, which was stuck at $1,648 an ounce.

Oil prices were trying to rebound, after falling more than 6% last week, as fears of a slowdown in demand trumped OPEC’s plans to cut production.

Brent crude firmed 90 cents to $92.55 a barrel, while U.S. crude rose 84 cents to $86.45 a barrel.

($1 = 0.8892 pounds)

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Reporting by Marc Jones; Additional reporting by Wayne Cole in Sydney; Editing by Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

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