Sterling crisis puts spotlight on Bank of England and UK Treasury

Good evening,

The pound’s fall to a record low today triggered turmoil in financial markets and a late statement from the Bank of England and Treasury did little to settle investor nerves.

The central bank said it would assess the turbulence in UK financial assets at its next planned meeting in November after sterling lost as much as 4.7 per cent to trade as low as $1.035 against the dollar earlier today.

The market jitters also led the government to issue a statement bringing forward plans for a new “medium-term fiscal plan” to be published on November 23.

UK government bonds remain under heavy selling pressure, with the 10-year gilt dropping in price, pushing yields up by 0.38 percentage points to 4.2 per cent. Two-year yields, which are particularly sensitive to interest rate expectations, have surged to 4.5 per cent, from 3 per cent at the end of August.

While the investor sentiment following UK chancellor Kwasi Kwarteng’s vow to stick with his debt-financed tax cuts and energy subsidies is clear, the fiscal shift has prompted mixed reactions among Conservative MPs.

Many have expressed fears about the effect on sterling, with former chancellor George Osborne saying: “You can’t just borrow your way to a low-tax economy . . . you can’t have small-state taxes and big-state spending.” However, farming minister Mark Spencer praised the agenda as “ambitious” and said it would “stimulate growth within the economy that benefits us all”.

Meanwhile, Paul Marshall, chief investment officer of Marshall Wace, accused the BoE of having “lost control of the UK bond market”, adding: “Its timidity is now having an impact on both the gilt market and sterling. That is the essential context for the market reaction to the mini-Budget. Once you lose market confidence, it is doubly hard to win it back.”

But finance and economics commentator Toby Nangle put the blame for the market reaction squarely at the feet of Kwarteng. “It largely reflected financial markets getting increasingly concerned about the direction of UK macroeconomic policy,” he said.

“Nothing in gilt markets in the past 35 years — not the UK’s ejection from the Exchange Rate Mechanism, 9/11, the financial crisis, Brexit, Covid or any Bank of England move — compares with the price moves in reaction to the chancellor’s mini-Budget,” he added.

European equity and fixed income markets also fell today as investors fretted over the impact on the global economy of aggressive interest rate rises, as policymakers try to stamp out soaring inflation.

“Markets picked up today where they left off on Friday as Monday morning started on a ‘risk off’ footing, with yields making fresh highs around the world without much relief in sight,” said analysts at Citigroup.

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Need to know: the economy

Susan Collins, president of the Federal Reserve’s Boston branch, has warned that the US economy is at risk of tipping into a recession as its central bank seeks to ensure high inflation does not become more deeply entrenched. “A significant economic or geopolitical event could push our economy into a recession as policy tightens further,” said Collins in her first public remarks since taking up the position.

Meanwhile in Germany, recession fears have dragged business confidence to 28-month low in Europe’s largest economy. The Ifo Institute’s index of business confidence slipped to 84.3 points, down from 88.6 last month and below the 87.1 forecast given by a group of economists in a Reuters poll. “The German economy is now clearly in a downturn,” said Melanie Debono, an economist at Pantheon Macroeconomics.

But there is some positive economic news, according to Ruchir Sharma, FT contributing editor and chair of Rockefeller International. There are seven countries, including Vietnam and Saudi Arabia, that “defy the prevailing pessimism” and “share some combination of relatively strong growth, moderate inflation or strong stock market returns”.

Latest for the UK and Europe

The Kremlin has sought to calm Russian society after President Vladimir Putin’s decision to mobilise the army’s reserves led to protests and prompted people to flee across the few remaining open borders. Images of crowded airports and queues of cars at Russia’s land borders have undermined the Kremlin’s portrayal of the call-up as a widely accepted measure.

Italy has elected its first female prime minister and put Giorgia Meloni’s arch-conservative Brothers of Italy on course to lead the country’s first far-right government since the second world war.

Global latest

The Supreme Court’s ruling to overturn Roe vs Wade is upending US midterm elections by energising Democrats and presenting challenges to Republicans. As our Big Read explains, volunteers found the topic “dominating doors” during recent canvassing operations.

China’s decision to end Hong Kong’s Covid quarantine measures on Friday has led business people to ask what does Beijing’s relaxing of the rules mean for the mainland’s zero-Covid policy?

Elon Musk’s Starlink has activated its satellite broadband service in Iran after the US allowed private companies to offer uncensored internet access to the country amid protests that have caused more than 40 deaths. Starlink users are able to bypass a country’s terrestrial communications networks, freeing them from internet censorship, but a special terminal is needed to receive a signal.

Need to know: business

Apple has begun producing its iPhone 14 model in India. The company, which makes most of its iPhones in China, has been shifting some of its production elsewhere as geopolitical tensions rise between Washington and Beijing and China’s harsh pandemic policies disrupt business.

The boss of KPMG’s United Arab Emirates business has attempted to shore up his position by sending the firm’s biggest clients a statement signed by its 30 capital partners swearing their unity and allegiance to the firm. The client note, seen by the Financial Times, comes on the back of a series of leaks from inside KPMG Lower Gulf alleging serious problems at the accounting firm, including nepotism, cronyism and a culture of fear.

Alan Jope is to retire as chief executive of Unilever at the end of 2023, following investor discontent over a lacklustre performance during his time leading one of the world’s largest consumer goods groups.

The World of Work

Despite surging inflation and recession fears, every sector — from tech to hospitality — is facing a fight for the top candidates. Management editor Anjli Raval explores the talent wars, including 40 per cent pay rises and free gym membership.

Young entrepreneurs are exploiting TikTok’s influence to build viable businesses in real life, or IRL as the kids say. Teen influencers are making thousands of pounds by joining up with peers to hold pop-up events.

Some good news . . . 

If you need a distraction from today’s market turmoil, FT Alphaville has you covered with this fun piece.

Alternatively, if you’re more of a practical person, in a recent review of over 100 studies, scientists have determined that exposure to cold water and air is truly good for you. Experts say cryotherapy could prevent or reduce diabetes, obesity and cardiovascular disease. (Good News Network)