Pound plunges below $1.11, FTSE 100 slides and UK bonds tumble as mini-budget spooks markets – business live | Business

‘Fire sale’ of UK assets as markets are spooked by mini-budget

Sterling is now tumbling against the euro too, as UK assets are hammered by the huge borrowing needed to fund the tax cuts announced today.

The pound has dropped by more than a euro cent to €1.132, its weakest level since February 2021.

Sterling is plumbing new depths against the dollar too – now down almost two cents at $1.106.

Neil Wilson of Markets.com says:

Sterling reacting with sub-optimal pessimism to the fiscal event with a fresh 37-year low with a 1.10 handle. And it’s not just a dollar move – see EURGBP.

The domestically-focused FTSE 250 share index has tumbled by 1.6% to its lowest since November 2020.

And government bonds continued to be hammered, as investors brace for the flood of debt sales to fund tax cuts and energy subsidies.

From the Debt Management Office – “The DMO’s Net Financing Requirement (NFR) for 2022-23 is rising by £72.4 billion to £234.1 billion following the publication today of the Government’s Growth Plan. “

— Ann Pettifor (@AnnPettifor) September 23, 2022

Wilson says there is a “fire sale of UK assets” which is “absolutely horrible to watch”.

The reaction in the bond market to the misnamed mini-Budget (it was anything but mini!) is striking with yields surging after the chancellor unveiled sweeping tax cuts that abandon any semblance of fiscal discipline. It means more borrowing and more borrowing costs. This is not the reaction any chancellor wants from a budget but what else could he expect?

Of course it’s not just vigilantism, per se – traders are now betting the fiscal easing will drive the Bank of England to take a much more forceful approach to tightening. Markets now indicate a 50% chance the BoE goes for a jumbo 100bps hike in November.

Key events

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UK interest rates seen soaring over 5% by next summer

The money markets are now anticipating that UK interest rate could soar over 5% by next summer, due to the impact of the government’s tax cuts.

That’s more than twice their current level, even after the Bank of England’s half-point increase on Thursday, to 2.25%.

It would drive up the cost of variable mortgages sharply, and other forms of credit, hitting borrowers badly.

Implied UK interest rates
Photograph: ING

ING explain:

Bond holders are already rattled by inflation and by the prospect of more Bank of England (BoE) hikes. Even if the central bank hiked only 50bp yesterday, compared to market pricing of 75bp, markets are betting that the pace of hikes will have to accelerate.

The recent jump in yields implies that Bank Rate will peak next year well above 5%.

That in itself is not a great backdrop for bonds but what has rattled investors is the prospect of the BoE hiking more in response to generous fiscal policy.

100 bps increase on the cards for the UK

A one point increase will lift interest rates to 3.25%, according to interest rate swaps tied to meeting dates. Expectations are for borrowing costs to rise to over 5.5% next year which would still be below the last peak set in 2007.

— Max HarryHindsight Capital (@MaxDrake007) September 23, 2022

Anxiety about the cost of freezing energy bills is also hitting UK gilts (government debt).

Investors are worried the UK Treasury may have signed a blank cheque, because the cost of the guarantee depends how high gas and electricity prices remain.

ING’s Senior Rates Strategist Antoine Bouvet and Global Head of Markets Chris Turner, explain

Alongside the confirmation of additional borrowing this year, the raft of tax cuts unveiled today clearly implies that it will not be contained to just this fiscal year.

The cost of the newly-announced measures is reported to be £160bn over five years but, with the cost of the energy price guarantee highly dependent on wholesale energy prices, investors are worried the Treasury has effectively committed to open-ended borrowing.

For all Kwasi Kwarteng’s talk about getting growth up to 2.5%, the mini-budget may only deliver higher interest rates, and a higher national debt in the long term.

So warns Ruth Gregory of Capital Economics:

The Chancellor claimed that this was a plan for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the near-term boost to GDP fades, the legacy of the government’s fiscal plans will be higher interest rates and a higher public debt burden.

The market reaction, which included a jump in gilt yields, means higher borrowing costs are already here.

The cost of insuring Britain’s debt against a default has risen to its highest level since mid-2020 as concerns mounted about the government’s plans to slash taxes and ramp up spending, Reuters reports.

Here’s the details:

S&P global market intelligence data showed 5-year credit default swaps (CDS) – derivative instruments that debt investors typically use to hedge risk or bet against something – jumped 3.5 basis points to 34.5 points.

Such a large move is unusual for a G7 economy and it took the CDS level to its highest since mid-2020, when global markets were still in the most volatile stage of the Covid-19 crisis.

As the UK issues its own currency, it can’t ever be forced to default on its debt, though.

Bond market ‘completely spooked’ by Kwarteng

The bond market is ‘completely spooked’ by Kwasi Kwarteng’s mini-budget.

So warns Toby Nangle, former global head of asset allocation at Columbia Threadneedle.

He has shown how today’s surge in five-year gilt yields (as bond prices have slumped) is worse than in any crisis since 1993.

Really hard to overstate the degree to which the Kwarteng Budget has just wrecked the Gilt market.

Chart shows 20 day change in 5yr fixed rate yields since 1993. Market completely spooked. pic.twitter.com/cQSOPqAclc

— Toby Nangle (@toby_n) September 23, 2022

Pound parity suddenly looks more likely following the mini-budget, says Fiona Cincotta, Senior Financial Markets Analyst at City Index.

Far from soothing concerns over the outlook for the UK economy, Liz Truss and Kwasi Kwarteng’s economic plan for the UK has sent the pound plunging. The announcement of the largest tax cuts since 1972 to boost growth and stave off a recession that has already started, has triggered a crash in the pound and the bond market.

The selloff in UK assets reflects the sheer panic as the new government’s stimulus package will not only grow an already sizeable debt burden, potentially to unmanageable levels but will also add to inflationary pressures.

The BoE, which has been reluctant to hike rates aggressively, will need to roll up its sleeves and fight inflation with larger rate hikes for here. Expectations for a 1% hike in November are already climbing.

It’s difficult to see how the pound can recover from here. Investors are pulling out of UK assets rapidly and who can blame them? Drawing comparisons historically, the last big tax giveaway in 1972 resulted in rampant inflation, unmanageable debt, and an IMF bailout.

Suddenly pound parity with the USD doesn’t look so unlikely.

Resolution: mini-budget means £55k tax cut for those on £1m/year.

The Resolution Foundation have rapidly assessed the impact of today’s mini-budget, and warned that the UK will borrow hundreds of billions more than expected.

They say::

The Chancellor’s £45bn package of tax cuts announced today, the largest in a single fiscal event since Anthony Barber’s ill-fated 1972 Budget, will boost growth in the short-term but raise interest rates and see an additional £411 billion of borrowing over five years.

The deterioration of the UK’s economic outlook since March, and additional packages of energy support, are estimated to have increased borrowing by £265bn over the next five years. Today’s tax cuts of £146bn raising that to £411bn.

Resolution has also worked out that someone on an income of £1 million will receive a tax cut worth £55,220 next year.

Very little goes to the poorest households:

Almost two-thirds (65%) of the gains from personal tax cuts announced today go to the richest fifth of households, who will be better-off on average by £3,090 next year.

Almost half (45%) will go to the richest 5% alone, who will be £8,560 better off.

But just 12% of the gains will go to the poorest half of households, who will be £230 better off on average next year.

Reminder, our Politics Live blog has full details:

Emma Mogford, Fund Manager at Premier Miton Investors, says markets will worry about the impact of the mini-budget on the economy:

“I suspect markets will worry that these tax cuts will keep demand for goods high, boosting inflation and hence putting upward pressure on interest rates. That is bad news for companies with lots of debt.”

Pound vs the US dollar

The blue-chip FTSE 100 index has just fallen through the 7,000 point mark for the first time since June.

The Footsie has shed 2.4%, or 170 points, to 6990 – the weakest level since March 2022.

Nearly every share is in the red, with warehouse group Segro, North Sea oil and gas producer Harbour Energy, and property developer Land Securities the top fallers, all down over 5%.

There’s no recovery in the pound yet either:

Markets across Europe are also heavily in the red, after this morning’s flash PMI surveys showed the Eurozone economic downturn deepened in September, with business activity contracting for a third consecutive month.

‘Fire sale’ of UK assets as markets are spooked by mini-budget

Sterling is now tumbling against the euro too, as UK assets are hammered by the huge borrowing needed to fund the tax cuts announced today.

The pound has dropped by more than a euro cent to €1.132, its weakest level since February 2021.

Sterling is plumbing new depths against the dollar too – now down almost two cents at $1.106.

Neil Wilson of Markets.com says:

Sterling reacting with sub-optimal pessimism to the fiscal event with a fresh 37-year low with a 1.10 handle. And it’s not just a dollar move – see EURGBP.

The domestically-focused FTSE 250 share index has tumbled by 1.6% to its lowest since November 2020.

And government bonds continued to be hammered, as investors brace for the flood of debt sales to fund tax cuts and energy subsidies.

From the Debt Management Office – “The DMO’s Net Financing Requirement (NFR) for 2022-23 is rising by £72.4 billion to £234.1 billion following the publication today of the Government’s Growth Plan. “

— Ann Pettifor (@AnnPettifor) September 23, 2022

Wilson says there is a “fire sale of UK assets” which is “absolutely horrible to watch”.

The reaction in the bond market to the misnamed mini-Budget (it was anything but mini!) is striking with yields surging after the chancellor unveiled sweeping tax cuts that abandon any semblance of fiscal discipline. It means more borrowing and more borrowing costs. This is not the reaction any chancellor wants from a budget but what else could he expect?

Of course it’s not just vigilantism, per se – traders are now betting the fiscal easing will drive the Bank of England to take a much more forceful approach to tightening. Markets now indicate a 50% chance the BoE goes for a jumbo 100bps hike in November.

The United Kingdom Debt Management Office is raising its debt issuance plans for the current financial year by £72.4bn, to £234.1bn, to cover the cost of the unfunded tax cuts in today’s mini-budget.

The DMO will need to issue an extra £62.4bn of gilts – taking the total to £193.9bn – plus another extra £10bn of short-term Treasury bills (to cover debt management needs).

That’s fuelling the selloff in government bonds, as investors will demand a higher rate of return to buy this debt.

Pound tumbles below $1.11 to fresh 37-year low

Sterling is tumbling more sharply, as the financial markets give their verdict to the swathe of unfunded tax cuts announced by Kwasi Kwarteng this morning.

The pound has dropped below $1.11 against the US dollar, for the first time since 1985, as investors baulk at the huge extra borrowing needed to fund today’s plans.

There were times before where there was of loss of confidence in the pound.
The pandemic £/$ 1.145
The start of the 🇷🇺 / 🇺🇦 war 1.14
Confidence now is lower still as we dip into 1.11’s to the dollar. pic.twitter.com/ZFdrqUL3vX

— Simon Dalling #FBPE #ResistOrganise 🐟🇺🇦🌻🇪🇺🌱 (@SimonDalling) September 23, 2022

Rachel Winter, Partner and Investment Manager at Killik & Co, says the recent weakness of sterling illustrates a lack of confidence in the government’s plans.

The pound is down 15% against the dollar over the last six months, and this morning’s budget has sent it down further.

This chart shows how UK bonds are slumping (pushing up yields) while other sovereign debt prices are much more stable:

UK government bonds have been hammeded by concerns about the extra borrowing needed to fund chancellor Kwarteng’s huge tax cuts.

The yield, or interest rate, on two-year UK gilts is surging, hitting to its highest level since the financial crisis of 2008.

Two-year gilt yields have jumped by 37 basis points, a massive one-day move, to over 3.8%.

Benchmark 10-year gilt prices have also weakened, pushing up their yield to the highest since 2011.

Two year Government borrowing gilt rates has shot up 30 basis points to 3.9%.. less than 3.5 this morning… a huge move today. was 3.1 on Tuesday, was 1.7 when Truss took lead over Sunak in August pic.twitter.com/6bSM9x20GZ

— Faisal Islam (@faisalislam) September 23, 2022

RLAM Head of Multi Asset Trevor Greetham says Kwarteng’s package would have made more sense after the financial crisis of 2008 – rather than today.

“Action to help struggling households and businesses pay their heating bills this winter was essential, but the scale of the tax cuts and spending increases in this announcement is breath-taking.

Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary Global Financial Crisis, when borrowing costs were low and private sector balance sheets were deleveraging. Now with spare capacity non-existent, inflation at a forty year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride.”

Kwarteng scraps 45% top rate of income tax – in biggest package in half a century

Over in Parliament, Kwasi Kwarteng has announced a staggering swathe of tax changes – in what appears to be biggest tax event since the early 1970s,

The chancellor has produced a huge rabbit from his hat – scrapping the 45% higher rate of income tax entirely, and cutting the basic rate from April 2023 from 20% to 19%.

Kwarteng also cancelled next year’s increase in corporation tax from 19% to 25%, scrapped planned increases in duty rates for beer, wine and cider, abolished stamp duty below £250,000 – and £435,000 for first-time buyers – and is winding down the Office of Tax Simplification (OTS).

RECAP OF TAX CUTS

Income tax:
Top rate cut – 45p to 40p
Basic rate cut – 20p to 19p

National insurance:
Rise reversed

Stamp duty:
Abolished below £250k
Abolished below £435k for first buyers

Big biz:
Cancelled rise to corporation tax
No cap on bankers bonuses#minibudget

— Paul Brand (@PaulBrandITV) September 23, 2022

The chancellor confirms almost 40 investment zones will be created with tax breaks for businesses, ditched the bankers bonus cap, and will bring forward measures to streamline regulations and remove EU-derived laws.

He also announced the government will legislate to tackle “militant trade unions” from closing down key infrastructure through strikes.

The laws will require unions to put pay offers to a member vote, to ensure strikes can only be called once pay talks have genuinely broken down.

Here are all the key points:

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