The pound fell to a record low on Monday and a further sell-off in UK gilts pushed eurozone yields higher as last week’s fall in Britain’s budget statement rattled markets for a second session.
Stock markets around the world also fell as concerns over high interest rates continued to put pressure on the financial system, albeit in a rare recent example of a media event with less impact on the market. than expected, reaction to the election result in Italy was subdued.
The pound plunged nearly 5% at one point in Asian trade to break below 1985 lows and hit $1.0327. The moves were exacerbated by weaker liquidity in the Asian session, and the currency had last rallied to $1.072.
Britain’s Finance Minister Kwasi Kwarteng announced on Friday he was scrapping the country’s highest tax rate and canceling a planned increase in corporation tax – in addition to a hugely expensive plan to subsidize utility bills. ‘energy.
The euro, which fell to its lowest level in 20 years against the dollar on Monday, nevertheless rose more than 1% against the pound to 90.21 pence, after having reached 92.29 pence at the start of the day, its highest since December 2020.
“The market is now treating the UK as if it were an emerging market,” said Rabobank strategist Michael Every in Singapore.
“If this spills over to European trade, you’ll get at the very least a public statement from the BOE threatening (action) and… a strong possibility that they have to hike between meetings, and a big one at that.”
The carnage was not limited to currencies. Five-year gilt yields jumped more than 40 basis points to their highest level since October 2008, pushing yields on eurozone government bonds higher.
Germany’s 10-year government bond yield hit its highest since December 2011 at 2.128%, [DE10YT=RR] and Italy’s benchmark bond yields hit their highest level since 2013. [GVD/EUR]
These decisions were in keeping with the bigger picture, rather than an outsize response to Sunday’s election, after which Giorgia Meloni is set to become Italy’s first female prime minister to lead her most right-wing government since World War II. world.
“There are no big surprises. I expect a relatively small impact given that the League, the less pro-European party, seems to have come out weak,” said Giuseppe Sersale, fund manager and strategist , Anthilia Capital Partners, referring to another right-wing party led by Matteo Salvini.
“The market knew this was how it was going to end and will remain focused at this stage on economic growth, monetary policy tightening and public finances, which remain a slippery slope for Italy.”
The pound’s tumble is just the latest troubling move as jitters among investors strain global financial markets.
Two-year Treasury yields broke through 4.3% to a new 15-year high, and although moves in European stock markets were less dramatic than bonds and currencies, the European index STOXX 600 [.STOXX] slipped for the third consecutive session on Monday, falling to a new low since December 2020. [.EU]
Commodities and mining stocks led the declines as they are particularly exposed to a recession.
MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 1.4% to a two-year low and is heading for an 11% monthly loss, the largest since March 2020.
Oil and gold were under pressure due to the greenback’s rise, with gold hitting a 2.5-year low at $1,626 and Brent futures lasted about 0.5% after hitting a 2.5-year low. fell to their lowest since January at $85.06 a barrel. [GOL/][O/R]
“There has been economic logic at play, as central banks have raised rates to drive monetary policy into restrictive territory, to drop below trend growth for a while, – a polite way of saying a recession – and then you get lower inflation,” Samy said. Chaar, Chief Economist at Lombard Odier.
“The question is whether the financial world can get through this streak. It feels like we’re reaching the limit of that, things are starting to break, for example what we’re seeing with the pound sterling.”
(Additional reporting by Danilo Masoni in Milan; Editing by Sam Holmes, Ana Nicolaci da Costa and Hugh Lawson)
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