Aurelia Butler

Britain’s gamble to spur growth with unfunded tax cuts into an inflation surge has morphed into a bona fide crisis for sterling and UK government bonds, with questions for all governments seeking ever more debt-funded economic supports.Supercharging an already rampant U.S. dollar around the globe, the sterling/dollar rate – nicknamed ‘cable’ by traders – went into virtual freefall at one point early on Monday. Foreign investors ran for the exits after the new government’s fiscal plan on Friday threatened to stretch Britain’s finances to their limits and finance minister Kwasi Kwarteng promised even further tax cuts at the weekend. Sterling, which has cratered almost 10% peak-to-trough against the dollar over the space of a week, plummeted almost 5% at one point early on Monday to a record low against the dollar of $1.0327, breaching its prior all-time trough of $1.0520 from 1985. While it clawed back some of those gains as London trading opened, it remains down another 1% from Friday and was down almost 1% against the euro too.The pound’s plunge comes ahead big auctions of both long-term and inflation-linked British government bonds this week and increasing liquidity issues in the gilt markets.The scale of the pound’s losses and fiscal fears has many traders speculating about emergency rate rises by the Bank of England. Rate futures now price in a three-quarters-of-a-point hike to 3% on or before the BoE’s next meeting on Nov. 2.British 10-year gilt yields are above 4% for the first time in 12 years and the gilt yield premium over German bunds is now homing in on two full percentage points for the first time in 31 years – levels not seen since just before the pound was ejected from Europe’s pre-euro currency grid system, the exchange rate mechanism, in 1992. UK 2-year gilt yield moved above 4.5% – up a whopping 150 basis points this month and the highest since 2008, and reflecting mounting recession fears, the UK 2-10 year government bond yield curve is at its most inverted since the banking crash of 2008.Although relatively muted minor compared to sterling’s drop, the euro also slipped against the dollar after Italy’s weekend general election looked set to usher in the most right-wing coalition government since World War Two.Ten-year Italian government bond yields climbed close to 4.5% and are at are at their highest since 2013, in the aftermath of the euro sovereign debt crisis. But that move reflected the general selloff in bonds and, in stark contrast to UK government bonds, yield premia over German bunds were little changed from Friday as the rightist coalition looked well short of a two-thirds parliamentary coalition that would allow it to change the constitution without a referendum. Dollar pressures mounted everywhere.After last week’s dramatic intervention to buy yen on the open markets, Japan’s Finance Minister Shunichi Suzuki continued to warn that the country would act again to calm what it saw as excessive speculative curreency market moves. China also acted in a different way on Monday to rein in yuan ongoing slump against the dollar. The People’s Bank of China will from Wednesday raise foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20% from the current zero. With recession looming and inflation and interest rate pressures inceasing, soundings from European business are darkening and Germany’s Ifo business survey for September was well below forecasts. Warning of a global downturn ahead, the Organisation for Economic Cooperation and Development said central banks needed to keep fighting inflation and saw U.S. Fed rates as high as 4.75% next year.As we approach the end of the third quarter, the S&P500 is in the red for the three months and set to record its third consecutive quarterly loss since the aftermath of the Lehman Brothers collapse in 2008.Key developments that should provide more direction to U.S. markets later on Tuesday: * U.S. September Dallas Fed manufacturing index; August Chicago Fed activity index* Atlanta Fed chief Bostic speaks (By Mike Dolan, Editing by William Maclean, [email protected]. Twitter (NYSE:TWTR): @reutersMikeD) More

Welcome to Trade Secrets. It’s one of those moments (that is, most of the time) when there’s not a lot of substantive trade policy as such going on but a lot that affects trade. Last week there was a big flurry of central bank decisions and fretting about exchange rates, which is the subject of the main piece today. Meanwhile, the trade ministers from the G20 met last week ahead of the big leaders’ summit in November, but the whole process still seems to be hobbled by geopolitical pose-striking. Charted waters looks at why in England it might not be so grim up north.Plaza Accord, Schmaza AccordSharp increases in US interest rates and a soaring dollar are causing global alarm. As former Trade Secrets colleague Claire Jones writes, there’s an international backlash against the Federal Reserve. Wait a second. Is it . . . could it be . . . are we heading for . . . do you want me to say the words . . . CURRENCY WAR? Well, you can see how the US authorities might come to share widespread worries over the dollar’s strength, but there doesn’t seem much sign of it yet. The last big currency conflict was in the 2010s when US protests about an undervalued renminbi metastasised into a general moan that the US was itself deliberately weakening its exchange rate through quantitative easing. We’re currently seeing the inverse of that with tight US monetary policy and a strong dollar, a replay of the early 1980s that ended in the international Plaza Accord in 1985 to weaken the US currency. Unlike the 2010s, inflation and hence importing price rises through depreciation is a big concern, with many countries feeling themselves forced to match the Fed’s increases. Even the Swiss National Bank, which has been intervening like crazy against the Swiss franc for years, building up epically huge reserves, is worried about having a weak currency. It’s like a firefighter turning to arson.As Mohamed El-Erian, legendary markets guru and now president of Queens’ College, Cambridge, points out, the direction of the dollar’s travel makes total sense: it reflects higher US rates and growth. “The problem is the magnitude of the change. The most vulnerable economies in the developing world are having to run very tight monetary policy at a time when they are dealing with other things including the slowing global economy and energy security.” A string of debt defaults from lower-income countries that have borrowed in dollars is already under way.In some cases other countries have made things worse. Turkey, apparently running monetary policy on a dare, is cutting interest rates during an inflationary shock with predictable effects on the Turkish lira. Japan intervened to support the yen last week, its first buying operation since 1998. But the intervention is leaning against its domestic monetary policy where Japan is holding down the yield curve, continuing to stimulate like it’s 2012. In the UK, the announcement of a big fiscal loosening last week pushed up interest rate expectations but hit sterling hard, the markets apparently concluding that the abysmal quality of UK policymaking more than offset higher yields.But even concerns among less dysfunctional countries haven’t created a general realignment movement. Why? For one, the usual currency pugilists, China and the US itself, aren’t currently that bothered. China, its economy clobbered by the zero-Covid policy and falling global growth, will be helped by a weaker currency and has quietly let the renminbi slide, seeking only to control its descent.The US, meanwhile, needs some anti-inflationary pressure and a strong dollar provides it. Plaza happened when internationally exposed American manufacturers and farmers complained loudly enough about competitiveness. We haven’t yet got near that stage. Although President Joe Biden is obsessed with manufacturing, he has focused on domestic industrial policy based on public spending aimed largely at serving the American market. The use of domestic procurement provisions, such as the contentious tax breaks for electric vehicles, protect US manufacturers from international competition through subsidies rather than currency depreciation. Obviously this doesn’t help US exporters in third markets, but for the moment this doesn’t seem to be a big concern.Biden has also kept most of Donald Trump’s tariffs against China in place. To the extent that trade protectionism and weakening the currency are substitutes for each other, so far he’s gone for the former.How and when does the US become concerned and some Plaza-type action start to be a real possibility? If US unemployment rises sharply and American industry and labour unions focus again on currencies, the underlying calculus will start to shift. El-Erian reckons the most likely immediate triggers will be a political issue or a “financial accident” — some kind of markets crisis.But it’s likely to take a while. The Fed isn’t indifferent to suffering elsewhere, but it’s not its job to set monetary policy for foreign countries. Not until the US domestic pressures start to move will Washington become ready to act. This episode of dollar neglect most likely has a while to run yet.As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersWith the pound tanking against the dollar, interest rates escalating, high inflation and concern about recession, is there good news for the UK economy? Well, there is if you are in the north of England.This region is the only part of the UK that has attracted increased amounts of foreign direct investment, rising by almost three-quarters, according to data from fDi Markets, part of the Financial Times group, the Office for National Statistics and the Department for International Trade, my colleague Jennifer Williams reports.The figures were praised by the Northern Powerhouse Partnership, a lobby group created in the middle of the past decade to lift the north’s economic significance, whose economists include former Treasury minister Lord Jim O’Neill. But it also fell to O’Neill to give a reality check to the figures. The FDI rise represented the only “notable success” to have emerged from the Northern Powerhouse push to boost the region’s economy, he noted. (Jonathan Moules)Trade linksThe stalling of the EU-Mercosur trade deal has weakened Europe’s influence in Latin America. Inside Vietnam’s attempts to climb the international value chain.IMF bailouts have hit a record high as rate rises push lower-income countries’ borrowing costs.The Trade Talks podcast looks at the Biden administration’s new approach to Indo-Pacific trade.Trade Secrets is edited by Jonathan Moules More

On Friday, finance minister Kwasi Kwarteng announced he was scrapping the country’s top rate of income tax and cancelled a planned rise in corporate taxes – all on top of a hugely expensive plan to subsidise energy bills for households and businesses.British government bond yields ripped higher in response, rising by the most in a single day in decades on Friday, as investors ditched gilts, while London-listed blue chips hit their lowest since early March.Kwarteng on Sunday dismissed the freefall in the pound, saying his strategy was to focus more on longer-term growth and not short-term market reaction.In Asian trading on Monday, the pound fell by as much as 5% against the dollar at one point to a low of $1.0327, its weakest at least since the introduction of decimalisation in the early 1970s. Pound slumps and UK borrowing costs surge https://fingfx.thomsonreuters.com/gfx/mkt/jnpweqgjbpw/Pasted%20image%201664186514397.png MARKET REACTION: FOREX: Against the dollar, sterling was last down 1.4% at $1.07045, while against the euro, the pound was down 0.8% at 89.95 pence.STOCKS: The FTSE 100 fell 0.7%, under pressure from steep losses in shares of homebuilders.BONDS: Two-year gilt yields were last up 54 basis points at 4.53%, while 10-year yields rose 30 basis points to 4.13%COMMENTS:MARK MCCORMICK, GLOBAL HEAD OF CURRENCY STRATEGY, TORONTO DOMINION BANK, TORONTO:”The crux of the issue is that the macro policy mix will continue to push real yields lower in the face of a rising current account deficit. Sterling has long relied on the kindness of strangers to backstop the current account deficit, but the price action illustrates the market’s rejection of the evolving macroeconomic policy mix.”MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ:”There is only two choices for the country, one is (Kwarteng) moderates his package. This is not about the structural reforms enhancing growth and productivity, the markets will like that, nor is about energy stabilisation, this about the extra tax cuts that were introduced and that should surprise the markets on Friday.”So choice number one is that he recalibrates his package, politically difficult but economically needed. Choice number two is he leaves it to the Bank of England and in that case the Bank of England would have to hike in an emergency meeting because they don’t meet again until November. But that in itself goes against him. Again the image of driving a car with the chancellor foot on the accelerator and the governor foot on the brake. That is not a good way to drive the UK economy.”YOU-NA PARK-HEGER, CURRENCY STRATEGIST, COMMERZBANK, FRANKFURT:”Last week’s minutes of the Bank of England’s meeting made it quite clear that in its fight against inflation the BoE is putting some hope in fiscal policies. Measures such as the energy price cap, which will come into effect in October, could weaken inflation pressure and thus ease pressure on the BoE to fight inflation in a more determined manner.”However, the sterling moves recorded on Friday and especially this morning illustrate that this is not so easy. The presentation of the mini-budget was received quite badly by the markets – sterling literally collapsed. The significant tax cuts announced by the Treasury Secretary cause concerns for the currency markets because of rising government debt.”SAMY CHAAR CHIEF ECONOMIST, LOMBARD ODIER, GENEVA:”This doesn’t feel like a currency crisis, where the decline in a currency worsens the situation. Sterling needs to decline considering the deficits and the uncertainty around what the Bank of England will do, but at some point, it will fall to a level where the attractive return prospects it creates improves the prospects of economic and financial flows.”MICHAEL EVERY, STRATEGIST, RABOBANK SINGAPORE”The British have decided that going back to the 1980s on steroids is the best way to go, and clearly the market is just saying: ‘That’s not going to work,’ on steroids.”The market is now treating the UK as if it’s an emerging market. And they’re not wrong in terms of the policy response and the naivety of thinking that boosting demand rather than supply is how you deal with a supply-side shock.” SHAFALI SACHDEV, HEAD OF FIXED INCOME AND COMMODITIES, ASIA, BNP PARIBAS WEALTH MANAGEMENT, SINGAPORE”It’s quite interesting that you see a G10 currency weakening into a hike expectation. That makes you realise that the market is not very confident about the ability of the UK government to be able to fund their fiscal plans.”The math of it would imply that something needs to give, whether it’s terms of higher rates, or a weaker pound. And I guess the market is taking a very calculated bet that that is going to be the case.” PAUL MACKEL, GLOBAL HEAD OF FX RESEARCH, HSBC, HONG KONG”The movements over the last couple of trading days are quite fierce.”Normally you would think about a very strong fiscal package raising interest rate expectations should be positive for a currency, but this time around we’re not seeing that. We’re seeing the exact opposite.”What has happened in the last 48 hours or so, it’s a strong reminder about how suddenly the drivers for exchange rates can change.”KIT JUCKES, HEAD OF CUFRRENCY STRATEGY, SOCIETE GENERALE, LONDON”Markets have a tendency to overshoot and I wouldn’t overinterpret the fall this morning.”But there are two points. One is the loss of confidence in UK fiscal policy and that won’t help sterling. The second is that the mini-budget has allowed sterling to be the short of choice against the dollar.”LEE HARDMAN, CURRENCY ANALYST, MUFG, LONDON”The outsized market reaction to the UK government’s fiscal stimulus plans send a clear signal that market participants have lost confidence in the appropriateness of domestic policy settings in the UK.”PAUL DALES, CHIEF UK ECONOMIST, CAPITAL ECONOMICS, LONDON”The further fall in the pound in early trading mean that we’ve now reached the point where the Bank of England needs to step in in order to regain the initiative. There are a couple of ways it could do this.””First, Governor Bailey could come out this morning emphasising the Bank’s commitment to the 2% inflation target and providing a clear signal that it intends to raise interest rates aggressively at the next policy meeting in early November.””If this were coordinated with a message from the government that it is committed to long-term fiscal discipline and will bring forward plans to spell out how it intends to keep the public debt position stable following last week’s fiscal splurge, then it could relieve some downward pressure on the pound.” More

(Reuters) -Britain’s homebuilders index hit a more than 11-year low on Monday on concerns that a weaker pound could lead to more rate hikes by the Bank of England, potentially hurting house prices and demand.The pound plunged to a record low against the dollar early on Monday and British bonds were slammed on concerns over the government’s fiscal plan, unleashing calls for the Bank of England to deliver an immediate rate hike to restore investor confidence.”(It’s) more to do with massive rate hikes killing the sector,” Markets.com analyst Neil Wilson said.The housebuilders index fell 6% to hit its lowest level since March 2013.”The weak pound is driving expectations for further rate increases, which means lower house prices,” Peel Hunt analyst Sam Cullen said. Taylor Wimpey (LON:TW), Persimmon (LON:PSN), Berkeley Group (OTC:BKGFY) and Barratt fell between 5.0% and 7.5% by 10:41 GMT, pushing them to the bottom of the FTSE 100.Shares of Taylor Wimpey hit their lowest since 2014, Persimmon since 2016, and Barratt and Berkeley stocks since March 2020.UK homebuilders, whose shares saw their worst times ever during the 2008-09 global financial crisis, have seen government support come and go over the last few years and have had to contend with several setbacks including Brexit uncertainties and more recently a $5 billion bill, to remove dangerous cladding from buildings following a deadly 2017 London fire.They got a boost last week after new British Finance Minister Kwasi Kwarteng said stamp duty, a tax on house purchases, would be cut.However, there have been signs of cooling in the housing market and fears remain of an impending downturn in the sector, as a worsening cost-of-living crisis and a steep climb in mortgage rates cast a cloud over demand.Taylor Wimpey last month flagged a softer sales rate for July, fanning those concerns. More

KARACHI, Pakistan (Reuters) -Pakistan’s rupee rose on Monday as investors anticipated the appointment as finance minister of Ishaq Dar, who in his previous spells in the job was known to favour a strong currency.The current finance minister, Miftah Ismail, said on Sunday he would quit – the fifth holder of the job to go in less than four years during persistent economic turbulence, exacerbated recently by devastating floods.Government sources told Reuters he would be replaced by Dar, a member of Prime Minister Shehbaz Sharif’s ruling party who has already been finance minister four times. “The Dar factor is at play. There are memories of how he kept the dollar rate stable,” Fahad Rauf at Ismail Iqbal Securities told Reuters. The rupee opened the day slightly firmer, then strengthened further as news of the replacement spread. It closed at 237.02 to the dollar, up around 1.11% on the session, the central bank said. But traders said the gains would be limited in the current environment.The dollar was strengthening against most global currencies, and flood-hit Pakistan was in a tight spot with depleted foreign reserves, Rauf said.”There is no way (the rupee) can sustainably move against the tide in the current scenario,” Rauf added.NEAR DEFAULTThe ruling party has repeatedly said it inherited a wrecked economy from former prime minister Imran Khan, who was ousted in a vote of no-confidence in April – an accusation dismissed by Khan. As the new government took over, a rescue programme with the International Monetary Fund (IMF) was in the doldrums because of a lack of an agreed policy framework.Ismail said he pulled the country out of a near default situation, but markets have not responded positively, with the rupee tumbling to a record low and inflation crossing over 27%.Unpopular decisions Ismail took to adhere to the IMF preconditions, including rolling back power and fuel subsidies given by Khan in his last weeks in power, saw inflation rise and the rupee weaken still further.The economy is facing one of its worst balance of payment crises, and floods are estimated to have cost it nearly $30 billion. Earlier this month, the government cut its GDP growth forecast below 3% from a 5% budgetary target for 2022-23. More