The scale and speed of British asset sales have rattled global markets and heightened concern about the outbreak, as chaos in a major advanced economy exacerbated already simmering concern over sharp interest rate hikes in the United States and other countries.
After the UK’s mini-budget was announced on Friday, which included 45 billion pounds ($48 billion) of unfunded tax cuts, sterling fell to record lows with a sharp fall in British bond prices. Signs of turmoil emerged on Wednesday before the Bank of England (BoE) intervened to calm the markets.
This came as markets are already tense as a result of the energy crisis that has fueled inflation, as well as the dollar’s rise, which has sparked headwinds globally and prompted the Bank of Japan to make a rare intervention in the currency markets only last week.
“It’s like having a sandcastle completely falling off,” said Olivier Marciot, head of multi-asset investment and wealth management at Unigation Asset Management, referring to Britain’s contribution to global tension. “I think the UK is one of those parts.” It increases the suffering, it increases the tension.”
Concern about Britain’s new economic policy has exacerbated the already high volatility, with the turmoil in British government bonds spilling over into safe-haven US Treasuries and highly-rated German bonds.
It is clear that global concern is mounting about the potential repercussions of Britain’s steps. On Monday, Rafael Bostick, the head of the US Federal Reserve’s branch in Atlanta, warned that events in the UK could lead to greater economic pressures in Europe and the US, while the International Monetary Fund on Tuesday criticized Britain’s new fiscal plans. The Financial Times quoted US Treasury Secretary Janet Yellen as saying on Tuesday that the United States was monitoring developments in Britain.
“There will be impacts, there will be correlations … some market volatility, and then how it affects the global growth landscape … the US is a largely insulated economy … we are They are more insulated from a lot of global pressures, but with this going on, we’re not completely immune to what’s going on in Europe, China and Britain.”
Dan Evaskin, chief investment officer at Pimco Investments, said that while he believed developments in Britain did not present a systemic and significant risk, they added to the turmoil in already volatile markets.
With UK bond yields rising 100 basis points in two days to multi-year highs, US 10-year Treasury yields and German bonds also rose.
Bank of America’s Moov Index, which measures the volatility of the US fixed income market, also jumped to its highest level since March 2020.
Sharp volatility in sterling has reverberated in the currency markets, which are already experiencing escalating turmoil. According to the widely watched Deutsche Bank Currency Volatility Index, currency volatility on Wednesday reached its highest level since the market crash caused by the Corona pandemic in March 2020, jumping more than 20 percent from its levels a week ago.
The Bank of England’s announcement on Wednesday that it will buy as much long-term government bonds as it takes between now and October 14 to stabilize markets has led to some calm.
However, not all investors thought this was the best approach, with Stanley Druckenmiller of the Duxney family office saying that buying bonds is not appropriate in an inflationary environment.
The closely watched financial stress indicators remain under control. Borrowing costs in US dollars in derivatives markets rose sharply this week, but remained well below the levels recorded after the start of the Russian invasion of Ukraine in February and the market collapse due to the Corona pandemic in March 2020.
The volatility of the US stock market also jumped, according to the “Fear Index” (VIX) measures in the past days, but the index did not reach its highest levels recorded before that in 2022.
But the risk of contagion still exists against the backdrop of uncertainty in the global landscape and rising interest rates around the world.
“Markets are selling, central banks are very hawkish… This sense of confusion means the moves tend to exacerbate each other,” said Charles Diebel, head of fixed income strategy at Mediolanum Asset Management.
On Wall Street
The Standard & Poor’s stock index on Tuesday hit its lowest closing level in nearly two years, affected by economic tremors in the United States due to interest rate hikes.
Michael Perves, chief executive of Tollbakken Capital Advisors in New York, said some of the weakness in the securities may be linked to what is happening in Britain, because volatility there leads to a “risk off”, including the sale of US government bonds.
In times of acute stress such as during the market crash caused by the Corona pandemic in March 2020, investors are even selling safe-haven assets such as Treasuries to support liquidity and offset losses in other items in their portfolios.
Britain is the sixth largest economy in the world, and about five percent of global currency reserves are denominated in sterling, highlighting the importance of the United Kingdom in the global financial system.
While the sharp rise in US interest rates is already putting pressure on global markets, for example through the strength of the dollar, there is also increasing talk of a global move to calm the markets.
“To contain inflation, we need global action, and this global response should be aimed at calming demand … Obviously, as a stand-alone, That when the British Prime Minister and the administration relax fiscal policy, that, by definition, does not dampen demand.” (Archyde.com)