Stocks, sterling rise after UK tax cut that injects some confidence

LONDON/SYDNEY (Reuters) – Global stocks jumped for a second day on Tuesday after Britain’s decision to drop part of a controversial plan to cut taxes and a somewhat lackluster outlook for central bank action, which restored some confidence to investors.

British Chancellor of the Exchequer Kwasi Quarting announced on Monday that the government will back down from eliminating the tax break for high-income earners that was part of a package aimed at boosting growth.

The measure is only a small part of the 45 billion pound unfunded tax cut that has sent the pound to record lows and caused havoc in the gold bond market.

But that was enough to calm some recent market jitters, and along with the Bank of England’s emergency bond purchase, sterling was on the verge of recognizing most of the losses it had incurred since the mini-budget was unveiled on September 23.

Adding to the relief among investors, who experienced one of the most volatile quarters in recent history in the three months to September, was the Reserve Bank of Australia, which raised interest rates by much less than expected. .

The weaker reading of US manufacturing activity helped cool expectations of massive interest rate hikes by the Federal Reserve.

However, some analysts said that optimism may be misplaced.

“My firm opinion, however, is that this will not be the case. Whereas, technically, with a dual mandate, the Fed has effectively become a single-issue central bank; the issue is to return inflation to the 2% target.” said Michael Brown, chief strategist at CaxtonFX.

“Unless we see a few months of consecutive improvement in inflation data, it’s hard to visualize any sort of pivot, with another 75 basis points remaining in my base case for next month’s decision. It’s hard to be a long risk however on the radar.”

MSCI All-World Index (.MIWD00000PUS) It was up 0.8% on the day, while stocks in Europe enjoyed a good rebound, with the Stoxx 600 (.stoxx) FTSE London traded nearly 2% higher (.FTSE) Earn more than 1%.

Meanwhile, the pound rose 0.6% against the dollar to trade at $1.1390. Sterling is up more than 10% since the mini budget.

The dollar fell against a basket of major currencies, as the euro and the pound made upward progress and Treasury yields fell in light of a shift in investor expectations for the path of US interest rates.

US 10-year bond yields fell nearly 20 basis points on Monday, after topping 4.0% just last week. It was last down 7 basis points at 3.5795%.

“Remarkably, this downward move was entirely driven by lower real yields, with higher inflation on the day, which is again a sign that investors are seeking a less violent reaction from the Fed,” Jim Reed, strategist at Deutsche Bank said in daily note.

Trade weakened by holidays in China and Hong Kong, MSCI’s broadest index of Asia Pacific shares outside Japan (MIAPJ0000PUS.) It rose 1.7%, led by gains in Australia.

Enjoy it until it’s over

After September, when global bonds experienced one of the largest short selling in decades and any currency other than the dollar appeared to be collapsing, market watchers said the sudden return, buoyed by better sentiment in the UK market, was not unusual, but likely short-lived. .

“The shift … will not have a significant impact on the overall financial situation in the UK in our view,” said John Briggs, Head of Economics and Markets Strategy at NatWest Markets.

“(But) investors took this as a sign that the UK government can and is at least partially willing to back down from its intentions that have turbulent markets over the past week.”

S&P 500 futures rose 1%, after the index rebounded 2.6% (.SPX) Overnight, suggesting a second day of gains may be imminent on Wall Street later.

Other indicators of market stress are still flashing red. CBOE Volatility Index (.VIX) Still high and more than 30. Shares (CSGN.S) Credit Suisse bonds hit record lows on Monday as concern about the bank’s restructuring plans swept the markets, although some of those losses were reversed on Tuesday.

The Japanese yen hit 145 to the dollar on Monday – the level that prompted the official intervention last week – and was last at 144.65, while the euro was up 0.6% at $0.9878, three cents above last week’s 20-year lows.

“More volatility is almost guaranteed as currency markets refocus on US recession risks, which continue to grow,” said Miles Workman, chief economist at ANZ, with US jobs data on Friday the next major data point on the horizon.

Overnight, oil held on to gains on news of potential production cuts, and Brent crude futures rose 43 cents to $89.29 a barrel.

Editing by Sam Holmes and David Evans

Our criteria: Thomson Reuters Trust Principles.