Big UK tax cuts deepen sell-off, dollar rises and bonds tumble

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  • MSCI All-World hits two-year low
  • The dollar reaches its highest level in two decades
  • Selling sterling and gold after a ‘mini-budget’ in the UK
  • The Yen is down but traders are wary of further intervention
  • Treasury bonds headed for an eighth weekly loss

LONDON (Reuters) – Stocks hit a two-year low on Friday, the dollar surged to a two-decade high and bonds sold again as investors fear bigger interest rate increases are on their way to curb inflation, while British assets tumbled afterwards. Huge debt-funded tax cuts announced.

British assets were already weaker but extended their decline after the new British finance minister unveiled a historic tax cut agenda that will see government borrowing increase. UK bond yields are set for their biggest daily rise in decades, and money markets have been setting Bank of England interest rates as high as 5% by May next year. Sterling lost 2%. Read more

The mood in the markets has been tense all week, with major central banks offering another 350 basis points to raise interest rates to fight inflation, Japan intervening to prop up the yen and bleak PMI data on Friday pointing to a growing slowdown in major economies. Read more

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Interest rates have been raised in the US, Britain, Sweden, Switzerland and Norway – among other places – but it was the Federal Reserve’s signal that it expects US interest rates to continue to rise through 2023 that sparked the recent sell-off.

MSCI World Stock Index (.MIWD00000PUS) It fell to its lowest level since mid-2020 on Friday, after losing about 12% in the month or so since Fed Chairman Jerome Powell made clear that lowering inflation would hurt.

The euro fell for the fourth day in a row after data showed that the slowdown in the German economy worsened in September, as consumers and businesses faced an unprecedented energy crisis and spiraling inflation. Read more

European shares fell for a second day, pressured by losses in everything from banking to natural resources and technology stocks.

Stokes 600 districtwide (.stoxx) It is down about 2.2%, while the DAX is down in Frankfurt (.GDAXI) It lost 1.94%, making it one of the worst performing indicators in Europe.

“Almost anything besides inflation data and central bank policy decisions is just noise at the moment, with the market focusing firmly and almost unilaterally on how high rates are going across developed markets, and for how long they will stay at those peaks,” said Michael Brown, chief strategist at Caxton FX.

S&P emini futures are down 1.15%, indicating a weaker start on Wall Street later.

FTSE index in London (.FTSE) It lost 1.9%, on the back of the pound dropping 2% to another 37-year low and as weak as $1.1022 at one point. The cost of insuring UK debt against default has also jumped.

The cost of insuring UK debt against default is rising

“Low fiscal policy and tighter monetary policy are usually a positive mix for a currency — if it can be funded with confidence,” said Chris Turner, head of global markets at ING.

“Here’s the problem – investors are skeptical about the UK’s ability to fund this package, hence the amazing underperformance.”

dollar king

With US interest rates poised to rise faster and stay high for longer, the dollar hit a two-decade high and extended its double-digit gains for the year against multiple currencies. Refinitiv data showed that this week the Swedish crown, which is influenced by the mood of global investors, has repeatedly fallen against the dollar to its weakest since at least the early 1970s.

Dollar King reigns

Yields on benchmark 10-year US Treasuries rose as investors dumped inflation-sensitive assets such as bonds.

The 10-year yield rose 5 basis points to 3.776%, another 11-1/2 year high and on track for its eighth consecutive weekly increase.

Eurozone bond yields also rose sharply, with Italian 10-year bonds hitting 4.294%, the highest since late 2013, ahead of Sunday’s Italian elections.

The euro hit a 20-year low, dropping $0.9736.

The Japanese yen fell so sharply on Thursday that the Japanese authorities intervened to buy the currency for the first time since 1998 and halted its long decline. Read more

On Friday, the yen gave up some of its gains, with the dollar gaining 0.4 percent to 142.97 yen to the dollar. Few believe that the yen’s rally will continue given the extent of the BoJ’s pessimism.

Gold, which pays no interest, has been under pressure, especially over the course of the quarter, as yields have soared. It was last down 1.55% on the day around $1,644 an ounce, its weakest in two years.

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Additional reporting by Tom Westbrook in Sydney and Joyce Alves in London; Editing by Kim Coogle and Kirsten Donovan

Our criteria: Thomson Reuters Trust Principles.

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