December 7, 2022

Sterling fell in the latest ominous sign as market pressures mount

Sterling fell in the latest ominous sign as market pressures mount

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  • Sterling hits record low; Bank of England response risk
  • Euro falls to 20-year low, yen slips despite intervention fears
  • Asian markets slip, S&P 500 futures fall 0.6%

SYDNEY/LONDON (Reuters) – Sterling plunged to a record low on Monday, and a renewed sell-off in British bonds pushed eurozone yields higher as a pullback from last week’s financial statement in Britain roiled markets for a second session.

Stock markets around the world also slumped as concerns about rising interest rates continued to weigh on the financial system, although in a rare recent example of a news event that had less impact on the market than feared, the reaction to the Italian election result was muted.

The pound fell nearly 5% at one point in Asian trade to break below the 1985 lows and reach $1.0327. The moves were exacerbated by poor liquidity in the Asian trading session, and the currency last rose to $1,072.

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British Chancellor of the Exchequer Kwasi Quarting announced Friday that he has scrapped the country’s highest income tax rate and a planned increase in corporate tax – on top of an expensive scheme to support energy bills. Read more

However, the euro, which fell to a 20-year low on the dollar on Monday, was up more than 1% on the pound at 90.21 pence, after hitting 92.29 pence earlier in the day, its highest level since December 2020.

“The market is now treating the UK as if it were an emerging market,” said Michael Ivry, a strategist at Rabobank in Singapore.

“If this moves to European trade, you’ll at least get a public statement from the Bank of England threatening (action) and … a strong possibility that they have to make visits between meetings, and a big step in which – which.”

The massacre was not limited to currencies. Five-year Treasury yields jumped more than 40 basis points to their highest since October 2008, driving up government bond yields in the eurozone. Read more

The yield on German 10-year government bonds is at its highest since December 2011 at 2.128%, DE10YT = RR and Italian benchmark bond yields are at their highest since 2013.

The moves were in keeping with the public picture, not much in response to Sunday’s election, after which Giorgia Meloni appears to have become Italy’s first female prime minister to lead the most right-wing government since World War Two. Read more

Noting that the League, the least pro-European party, said Giuseppe Cercil, fund manager and strategist, Anthelia Capital Partners, there are no big surprises. to a separate right-wing party led by Matteo Salvini.

“The market knew this was how it would end, and at this point it will remain focused on economic growth, monetary policy tightening, and public finances, which remain a slippery slope for Italy.”

stress building

The pound’s fall is just the latest worrying move as investor volatility has rattled global financial markets.

Two-year Treasury yields topped 4.3% to a new 15-year high, and while moves in European stock markets were less dramatic than in bonds and currencies, the European STOXX 600 Index fell. New low since December 2020.

Goods stock (.SXEP) and mining (.SXPP) It led declines because it is particularly vulnerable to a recession.

MSCI’s broadest index of Asia Pacific shares outside Japan (MIAPJ0000PUS.) It fell 1.4% to a two-year low and is heading for a monthly loss of 11%, the largest since March 2020.

Oil and gold were under pressure due to the dollar’s rise, with gold hitting a two-and-a-half year low of $1,626 and Brent crude futures down about 0.5% after earlier dropping to their lowest since January at $85.06 a barrel.

“There was economic logic in place, where central banks would raise interest rates to push monetary policy into a restricted area, back off trend growth for a while, — a polite way of saying stagnation — and then you get lower inflation,” Sami said. Chaar, chief economist at Lombard Odier.

“The question is whether the financial world can go through this sequence. It looks like we’ve reached the limit of that, things are starting to fall apart, for example what we’re seeing with sterling.”

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Additional reporting by Danilo Masoni in Milan. Editing by Sam Holmes, Anna Nicholas Da Costa and Hugh Lawson

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