Tom Westbrook’s outlook on the future of European and global markets
Sterling rallied 4.5% from Monday’s all-time low in a manner almost as disturbing as the plunge. A slump in the gilt bond market is finding support.
Two-year and five-year gilt yields rose 100 basis points in two days. The cost of capital is changing so quickly that mortgage lenders can’t keep up and pull out of product repricing.
The Bank of England said it would not hesitate to raise interest rates. What that really means will be tested at a panel by GMT 1100 chief economist Huw Pill.
He must be asked about Finance Minister Kwassi Kwaten’s tax cuts and subsidies making his job more difficult and demanding higher rates. By November, the market has priced in 125 bps of rate hikes – which means there is a risk of unplanned rate hikes.
It’s a bondage, because moves in the pound will shock and awe, but the BoE doesn’t want to run out of ammunition in one go.
Indications implicit in the pricing of volatility options suggest the market is bracing for a surge in October – when ratings agencies will review the UK’s outlook – and November, when Kwarteng has pledged to cut debt details.
Asia took a slight gain on Tuesday as the dollar surged and stock index futures profited, but signs of stress abounded.
The decline in profits of Chinese industrial companies is accelerating.
Japan mourns assassinated leader Shinzo Abe at a state funeral at Tokyo’s Budokan, while his legacy of massive stimulus still hangs over bond markets. More unplanned bond purchases are needed to keep 10 APRs below the cap.
Florida is bracing for a hurricane.
Major developments that may affect the market on Tuesday:
Speakers: Bank of England Economist Huw Pill, ECB’s Louis de Guindos, Federal Reserve’s Charles Evans
Economy: Eurozone money supply, Hungarian, Moroccan central bank meetings, 5-year bond auctions in Germany and US, US durable goods, house prices