Key events
Filters BETA
Analyst: No denying government looks incompetent
The pound is holding onto most of its early morning gains, at around $1.123.
Fiona Cincotta, senior financial markets analyst at City Index and FOREX.com, warns that the markets are still fretting about the Truss government, despite the 45p tax rate u-turn.
The pound is clearly pleased with the move, as it lessens the huge unfunded borrowing burden, at least slightly. However, there is no denying that the move makes the government look incompetent, which is less than favourable for political stability in the UK.
The pound has been behaving more like an emerging market currency in recent weeks, and this behaviour from the government will do little to change that the perception. The first major U-turn within the first month of rule isn’t exactly an encouraging start for Liz Truss’ government.
The move could potentially limit gains in sterling as the market frets over the governments ability to ride this storm out in a coherent manner.
Kwarteng: mistake to attend champagne reception for Tory donors on day of mini-budget
Andrew Sparrow
Kwasi Kwarteng has said it was a mistake to attended a champagne reception for Tory donors on day of mini-budget, in an interview with Nick Ferrari on LBC.
Q: Why did you go to a party with hedge fund managers after the mini-budget?
Kwarteng says it was an event organised by the Conservative party. He was only there for about quarter of an hour, maybe more.
I spent, I think, quarter of an hour there, or maybe a bit longer. It was a party event, we have party events all the time.
Q: Do you regret going?
Kwarteng says:
I think it was a difficult call and I totally get how it looks. I just feel that it was something that I was signed up to do and I had to do
He goes on:
With hindsight it probably wasn’t the best way to go.
Q: Will there be more austerity measures?
Kwarteng replies: “I don’t think so at all.” He is focused on growth, he says.
Kwarteng has also suggested to BBC Breakfast that Liz Truss took the decision to scrap the abolishment of the 45p tax rate.
Andrew Sparrow’s Politics Live blog has all the details:
In the eurozone, the manufacturing sector’s downturn has accelerated.
Demand for goods from euro-area factories tumbled again in September, as orders dropped and some firms were forced to cut production due to soaring energy prices.
The latest survey of purchasing managers also found that business confidence has dropped to its lowest level since May 2020, as price pressures intensify, More here.
Jasper Jolly
Thames Water, Southern Water and other companies will be forced to cut tens of millions of pounds from consumers’ bills after the regulator said they had missed pollution targets.
Eleven water companies will have to return about £150m to customers in the form of lower bills in the 2023-24 financial year, the water regulator for England and Wales, Ofwat, announced this morning.
The 45p tax rate U-turn hasn’t brought much cheer to the stock market, though.
Britain’s blue-chip FTSE 100 index has dropped to its lowest level since March, down 1.1% or 80 points to 6,815 points. Banks and consumer groups are among the fallers.
The smaller, more domestically-focused FTSE 250 index is down 1% too – with travel companies such as cruise operator Carnival (-7.6%), Tui (-4.8%) and easyJet (-4.7%) dropping.
Recession worries and the recent selloff in government bonds are hitting stocks, say analysts at Saxo Bank:
Market sentiment continued to deteriorate late last week on geopolitical concerns and despite the Bank of England’s intervention helping to at least temporarily stabilize global sovereign bond markets after their aggravated slide of late.
Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin, sums up the market reaction:
“The pound and gilts have reacted well to the U-turn on plans to scrap the 45p tax rate. The derivatives market is now signalling one less rate increase since this U-turn on additional rate tax.
The move is symbolic more than fundamental with the tax cut making up around £2bn of about £40bn per year increase in funding requirement announced at the mini-budget.”
Markets no longer expect 6% UK interest rates next year
Investors are dialling back their expectations for UK interest rates next year, as gilt yields drop back.
The money markets now suggest Bank Rate will have risen to around 5.6% by next summer, down from the 6%+ levels feared last week.
Sky’s Ed Conway has tweeted the key chart:
Instant response to the change of mind on the 45p rate in money markets.
Traders no longer pricing in 6% interest rates by next year. Now somewhere between 5.5% and 5.75% pic.twitter.com/WNXbWsbo0a— Ed Conway (@EdConwaySky) October 3, 2022
But even so, homeowners whose fixed-rate mortgage deals are running out, or who are on trackers or variable rate deals, still face a sharp jump in their repayments.
The UK base rate is currently 2.25%, and until recently the markets had expected it would have risen to 4.5% by next spring.
The surge in borrowing costs forced mortgage lenders to withdraw hundreds of deals last week.
Someone who fixed at 2% two years ago could soon be looking at a remortgage rate at 5%. If they had a £200,000 mortgage over 25 years, that’s a rise in monthly payments from £848 to £1,169 – or an extra £321, as our explainer lays out here:
Despite the recovery in gilt yields this morning, Britain’s borrowing costs are still much higher than even a month ago, as the BBC’s Andy Verity flags here:
Since 8am gilt yields have dropped – perhaps suggesting relief that the government is listening to its critics on the markets. Currently down 11 basis points (a basis point is 0.01%) for 5-year gilt yield at 4.29%.
— Andy Verity (@andyverity) October 3, 2022
However, before we celebrate cheaper mortgages, remember that that rate was less than 3% on September 5 when the new government took power. So interest on 5 year fixed rate home loans is set to cost over a third more than it would have a month ago.
— Andy Verity (@andyverity) October 3, 2022
UK government bonds strengthen after tax U-turn
Gilts, the debt issued by the UK government, are rallying this morning after the humiliating decision to abandon scrapping the 45p tax rate.
Kwasi Kwarteng’s u-turn on the top rate of tax seems to be calming the gilt market, after prices tumbled in the panicky selloff following the mini-budget.
This has pushed down the cost of short and medium-term government borrowing (known as the yield on the bonds, which fall when prices rise).
The benchmark 10-year UK gilt yield has dropped by 10 basis points, to 4%, from 4.1% on Friday night.
Last week it spiked as high as 4.5%, having been just 3.5% before Kwarteng announced his unfunded tax cuts and spending pledges.
Shorter-dated two-year gilt yields are down 9 basis points to 4.2%.
Long-dated 30-year gilts (which are now being bought up by the Bank of England to calm the markets) have only strengthened slightly. Their yield has dipped a little to 3.76%, having hit 5% before the Bank intervened.
Significantly, other government bond prices are not moving as much. German 10-year bunds are flat, while US 10-year Treasury yields are only down 2 basis points.
This reaction, like the selloff last week, is being driven by the government’s actions, even though Kwarteng told the Today Programme this morning that rising interest rates are being driven by the US Federal Reserve (which is lifting interest rates to tackle inflation).
He made a similar point to LBC:
Mr Kwarteng tells @LBC that what happened in the gilt market “had nothing to do” with scrapping the tax rate.
He says that he accepts it was “controversial”.
In the “spirit of contrition and humility” he won’t go ahead with it, he adds.
— Theo Usherwood (@theousherwood) October 3, 2022
Victoria Scholar, head of investment at Interactive Investor, explains:
The Chancellor’s mini-budget sparked a major sell-off in the UK gilt market last week, prompting emergency intervention from the Bank of England. The dysfunction in the bond market has forced the Bank of England to carry out conflicting policies; one to stem inflation and another to avoid financial contagion. It is having to buy long-dated gilts to prop up its sovereign bonds and the pound.
Meanwhile it is likely to carry out a jumbo 100 basis point hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment.
Credit Suisse shares hit record low
Elsewhere in the markets, shares in investment bank Credit Suisse have dropped 10% in early trading to a new record low.
The fall comes despite the chief executive of Credit Suisse reassuring staff that the globally significant Swiss bank has a solid balance sheet, after credit markets rated its risk of default as the highest in a decade.
In a memo to staff on Friday, Ulrich Körner said there were “many factually inaccurate statements being made” in media coverage of the bank’s crisis, which has seen its share price plunge by 56% this year.
Körner said:
“I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,”
“We are in the process of reshaping Credit Suisse for a long-term, sustainable future – with significant potential for value creation.
“Given the deep franchise we have, with a longstanding focus on serving some of the world’s most successful entrepreneurs, I am confident we have what it takes to succeed.”
Read More:Pound and UK government bonds rally on 45p tax rate U-turn; recession fears mount – business live | Business
2022-10-03 06:20:00
