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U.K. In Crisis As Investors Dump Sterling, Gilts

www.investing.com/analysis/uk-in-crisis-as-investors-dump-sterling-gilts-200630341
U.K. In Crisis As Investors Dump Sterling, Gilts
By Darrell Delamaide/Investing.com   |  Sep 27, 2022 04:39AM ET
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  • Bank of England fails to reassure investors with emergency rate hike
  • Bond yields soar amid talk of a historic bear market
  • Bank of Japan defies trend but yen’s fall requires intervention

The UK has plunged into a full-fledged financial crisis after the astonishingly inept announcement by the new government on Friday that it would cut taxes and run up debt while the central bank proceeds to sell off some of its government bond portfolio.

The pound sterling rushed toward parity with the dollar and yields on UK government bonds skyrocketed as the Bank of England failed on Monday to reassure investors with an emergency rate hike, pledging only to consider the matter at its next monetary policy meeting in November.

Global investors have pummelled the government of Prime Minister Liz Truss and her finance minister, Kwasi Kwarteng, with a massive sell-off of the currency and gilts, as government bonds are known.

Keep in mind that nobody elected these people. Under the quirky and creaky parliamentary system in the UK, the new prime minister was chosen by fewer than 200,000 Conservative Party members after former Prime Minister Boris Johnson resigned under pressure over government parties during pandemic lockdowns.

Truss in turn picked a onetime economic historian who nonetheless has been in parliament since 2010 and was in Johnson’s cabinet to launch a fiscal stimulus just as the country, along with the rest of Europe, is poised on the brink of recession.

Bank of England Governor Andrew Bailey evidently was not inclined—or was told that he was not inclined—to help as the crisis took on its own momentum Monday.

The crisis in the UK overshadowed the widely expected victory of a far-right party in Italy’s snap election Sunday. Giorgia Meloni, whose Brothers of Italy party has its roots in Italian fascism, is poised to become the country’s first female prime minister as she pledges to follow a moderate path in government.

Yields on the 10-year Italian government bond rose to nearly 4.7% in the wake of the vote, from just above 4.3% on Friday. But yield on the 10-year gilt rose to nearly 4.3% on Monday after hitting more than 3.8% on Friday, compared to under 3.4% on Thursday, ahead of the disastrous “mini-budget” announced the following day.

The situation in Britain, where inflation was already forecast to hit double digits and now will be worse with the plummeting currency, makes the situation in the rest of Europe seem somewhat less dire.

European Central Bank President Christine Lagarde, however, warned again on Monday that the ECB will raise interest rates repeatedly over the next several policy meetings to cool demand and “guard against the risk of a persistent upward shift in inflation expectations.”

The Bank of America is already forecasting that the world is entering into its third historic bear market in bonds, after that in 1899 to 1920 and then 1946 to 1981. A French market strategist estimates that bond portfolios have already lost 20% of their value since their high point.

The Bank of Japan, meanwhile, is refusing to join other central banks in the helter-skelter rush to raise rates, as the governor, Haruhiko Kuroda, announced last week that the bank would stick with its policy of keeping short-term bond yields at minus 0.1% and 10-year yields at around zero. 

The Japanese yen has lost nearly 30% of its value against the dollar since the beginning of 2021 and continues to fall. The central bank had to intervene in currency markets last week for the first time in more than two decades to stem the currency’s decline.

The Fed is keeping with its plan to keep aggressively raising rates until inflation declines in a convincing fashion. The new president of the Boston Fed, Susan Collins, said in her first policy speech Monday that there were signs that price increases from supply-chain disruptions were beginning to abate, but the Fed must keep at it to head inflation in the direction of its 2% target.

Collins is a voting member of the Federal Open Market Committee this year. Her largely dovish speech, saying there was still a good chance of avoiding a hard landing for the U.S. economy, nonetheless reflected the Fed’s resolve to break inflation.

U.K. In Crisis As Investors Dump Sterling, Gilts
 

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U.K. In Crisis As Investors Dump Sterling, Gilts

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Comments (10)
Saun Melkon
Saun Melkon Sep 28, 2022 7:05AM ET
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Check out the counterintuitive bond market rally they just initiated in the UK. Supposedly to fight inflation, too...
Saun Melkon
Saun Melkon Sep 28, 2022 4:24AM ET
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The stock market is pure FRAUD: stock prices are based on LIES. Instead of debating whether stocks will go up or down, the stock market should be CLOSED. The bankers know how much money you have and what you're betting on - they can see your bank account and your brokerage account. So the bankers will wrongfoot you REGARDLESS of actual economic data, simply by moving the markers against what the majority investor position is. In other words, the bankers are operating based on INSIDER TRADING which you simply cannot beat. The most likely outcome is; they'll scare you into selling your shares and your commodity positions, and prevent you from making too much money on the short side (largely through extreme volatility and NOT via significantly lower prices). When they can see that 80+ percent of investors are OUT of the markets and sitting on cash, they'll suddenly lower interest rates and/or inflate the money supply, disguised as benevolent financing of stimulative government spending.
Mike Hardwicke
Mike Hardwicke Sep 27, 2022 12:06PM ET
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i would say personally that the EU/WEF installed criminals are the Fascists, not the incomng Italian Right😩
TEA PEA
TEA PEA Sep 27, 2022 11:51AM ET
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London has fallen
Pranvera Bejko
Pranvera Bejko Sep 27, 2022 10:53AM ET
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COSA INVESTIRE NON HO IDEA.INGLESE NON CAPISKO.
Ash Kot
Ash Kot Sep 27, 2022 10:20AM ET
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Well I guess that's one way to say goodbye by Queen. "so long losers, my son will handle things, who doesn't know anything, and don't get me started on new PM" lol
Ash Kot
Ash Kot Sep 27, 2022 10:20AM ET
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Well I guess that's one way to say goodbye by Queen. "so long losers, my son will handle things, who doesn't know anything, and don't get me started on new PM" lol
Ash Kot
Ash Kot Sep 27, 2022 10:20AM ET
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Well I guess that's one way to say goodbye by Queen. "so long losers, my son will handle things, who doesn't know anything, and don't get me started on new PM" lol
fun ledge
fun ledge Sep 27, 2022 10:16AM ET
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it is just traping buyers
Clyne Gahadzikwa
Clyne Gahadzikwa Sep 27, 2022 5:05AM ET
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It seems the sterling is recovering
 
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