It’s been decades since markets so resoundingly voted non-confidence in a developed country like the UK.
Deutsche Bank crunched some numbers today and Friday was the third-worst day for GBP since 1992 with the others being the post-Brexit vote day and the peak of the pandemic. They also have data going back to 1862 and it was the 41st worst day, with many of those above it related to fixed currencies and devaluations.
Today’s peak selling (-4.5%) exceeded Friday’s as well and may have been triggered where chancellor Kwarteng said more tax cuts are coming. That kind of stubbornness isn’t what markets want to see.
This certainly looks like a blow-off drop but it’s not clear what might halt it. Today’s rebound is somewhat curious as the drop has been pared to 43 pips but this is the kind of volatility you get at a moment like this.
Of course, a rapid decline in a currency certainly isn’t unprecedented. Even more concerning is the blow-up in gilts, where yields are up 29 bps today to 4.12%, which is 10 bps from the high.
The consequences of all this for the UK are dire. The Bank of England will need to hike more now and risks setting off a negative feedback loop if they can’t thread the needle.
The market is currently pricing in a 58% chance of a 125 bps hike at (or before) the November 3 meeting.
Equally concerning is the message this sends episode elsewhere: This is not the time for tax cuts and high spending. QE and structurally low inflation gave governments the wrong idea about easy money. This is the reckoning and even a cursory look at government finances elsewhere shows this won’t be a one-off.
Read More:Markets turning against a developed government in this way is extraordinarily rare
2022-09-26 12:23:00
