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UK financial markets will get a fresh chance to pass a ruling on Prime Minister Liz Truss’ economic program on Monday without the Bank of England around to offset any uncertainty. .
It is rare for a developed economy to have political fortunes caught up in market fluctuations. Traders’ brutal rejection of the prime minister’s financial plan sent the pound to a record low and forced Truss to sack Chancellor Kwasi Kwarteng, leading to the rollback of some tax cuts. . Questions about what to do to give investors confidence and Truss’s own future are also swirling.
BOE Governor Andrew Bailey said he spoke with the UK’s new Prime Minister, Jeremy Hunt, and they agreed on the importance of fiscal sustainability. That was after Truss’ unconvincing appearance on Friday, where the prime minister acknowledged the unusual tie she was in, saying “we need to act now to reassure the market about the our financial laws.”
Officials’ latest disapproval may help calm nerves. Yet even her government’s previously unthinkable moves were not proven enough to get investors on her side, and, with the BOE’s emergency bond-buying program now in expires, the UK market will start another craze for the week.
“Obviously confidence has been damaged by what has happened in the last three weeks and that could take some time to build,” said Rohan Khanna, rate strategist at UBS AG on Sunday.
Read more: Goldman downgrades UK Growth Outlook after Government imposes tariffs
The British pound rose 0.5% to $1.1226 in early Asian trade, after closing about 1.4% lower on Friday. For investors, the gold-plated market opening on Monday will be key.
While the financial landscape now looks more supportive with Hunt as prime minister, there is still uncertainty as to whether the liability-oriented investment funds, the strategies used by pension funds, have been. exacerbating the sell-off in the gold-plated market, it’s time to rebuild the cash buffer before the BOE backs it up or not.
“Clearly the message coming from the government should be a source of support for the market, but it is really difficult to say what percentage of the cleanup from the LDI community is still pending,” said Khanna.
Read more: Hunt Wins Bailey’s BOE Backing, Leaving Truss Sidelined in UK
UK gilts will resume trading at 8am on Monday in London. Another yield hike could force more moves from Downing Street, or even a fresh support plan from the BOE. Bond auctions on Tuesday and Wednesday will also be auctions worth watching.
Friday afternoon gave you an unsettling premonition of what might happen. While the gilts had a strong recovery when rumors of a comeback surfaced, they went up in smoke after Truss held a brief fascinating press conference on the details. how she plans to fill the UK’s fiscal black hole.
Friday’s dramatic sell-off brought 30-year gilts’ yield down to 4.78%, approaching the 5% level that some see as a baseline for BOE intervention. The stock has fluctuated near 60 basis points in a few hours, similar to the great moves that forced the BOE to enter the market last month.
Read more: The UK Markets’ frenzied week is nonstop, as told in the Charts
Richard McGuire, strategist at Rabobank in London, said: “The market wasn’t attracted by the remarkably brief press conference. “A U-turn is unlikely to restore credibility when it is coerced, while throwing one’s partner into a crime under a bus is also unlikely, as policy proposals are clearly an attempt. common force.”
No support
“The outlook for both politics and markets remains uncertain and the situation continues to evolve rapidly,” Daniela Russell, rate strategist at HSBC Holdings wrote in a note to clients. “The immediate question for gold-plated investors remains: how will the market navigate the end of the pullback?”
The BOE’s emergency bond purchase – announced at the heart of the market turmoil that followed the government’s failed fiscal plan – ended on Friday with the bank collecting nearly £20 billion in bonds. While it’s a small part of their £100 billion orchestra, it has brought some calm to volatile markets that now have to go it alone.
They still hope the BOE can do more, with some calling on the Governor to deliver on former European Central Bank President Mario Draghi’s pledge to save the euro.
“If the market does crash again, I don’t see any other option but for the BOE to stand up again,” said Marc Kersten, portfolio manager at Union Investment in Frankfurt. “This could be a sort of whatever is needed for Bailey.”
In a speech in Washington on Saturday confirming the sale was closed, Bailey said the BOE was not trying to adjust bond yields. “We will not hesitate to raise rates to meet our inflation target,” he said. “As things unfold today, my best guess is that inflationary pressures will require a stronger response than we might think in August.”
(British pound price update at the beginning of the Asian session)
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