Stocks and sterling’s rally after UK tax cut provide some confidence

LONDON: Global stocks rose for the second day on Tuesday after Britain’s decision to drop part of a controversial tax cut plan and slightly dimmer expectations for aggressive action by the bank central have returned some confidence to investors, according to Reuters.

Britain’s Finance Minister Kwasi Kwarteng announced on Monday that the government was backing away from rescinding a tax break for high earners that was part of a package aimed at boosting growth.

The measure is just a small part of the £45bn ($51bn) in unfunded tax cuts that have sent the pound plummeting to record lows and wreaking havoc on the stock market. gilts.

But that was enough to quell some of the recent angst in the market and, along with the Bank of England’s emergency bond buying, the pound was expected to make up for most of the losses suffered since the unveiling of the mini -budget on September 23.

Adding to the sense of relief among investors, who endured one of the most volatile quarters in recent history in the three months to September, Australia’s central bank raised interest rates far less than expected.

A weaker reading of US manufacturing activity helped temper expectations of larger rate hikes by the Federal Reserve.

However, some analysts said that optimism could be misplaced.

“My belief, however, is that it will not. Although technically dual-mandate, the Fed has effectively become a single-issue central bank; that problem being getting inflation back 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 see any kind of pivot, with another 75bp hike remaining my base case for next month’s decision. . It’s hard to get a long risk with that on the radar.

The MSCI All-World Index last rose 0.8% on the day, while European stocks enjoyed a decent rebound, with the Stoxx 600 trading nearly 2% higher and London’s FTSE earning more than 1%.

The pound, meanwhile, gained 0.6% against the dollar to trade at $1.1390. The pound has risen more than 10% since the mini-budget.

The dollar slid against a basket of major currencies as the euro and pound rose higher and treasury yields fell in light of a change in investor expectations for the trajectory of US interest rates.

Benchmark US 10-year yields fell nearly 20 basis points on Monday, after topping 4.0% last week. They were last down 7 basis points at 3.5795%.

“Remarkably, this decline was entirely driven by lower real yields, with inflation breakevens rising on the day, again a sign that investors are anticipating a much less aggressive reaction from the Fed,” said Deutsche Bank strategist Jim Reid. said in a daily note.

In holiday-thinned trade in China and Hong Kong, MSCI’s broadest index of Asia-Pacific stocks outside Japan rose 1.7%, led by gains in Australia.

After September, when global bonds saw one of the biggest selloffs in decades and any currency other than the dollar appeared to tumble, market watchers said a rollback, aided by a better sentiment in the UK market was not unusual, but would likely be short-lived.

“The about-face… won’t have a huge impact on the overall UK fiscal position in our view,” said NatWest Markets head of economics and market strategy John Briggs.

“(But) investors took it as a signal that the UK government could and is at least partially willing to reverse its intentions which have so disrupted markets over the past week.”

S&P 500 futures rose 1% after the index rebounded 2.6% overnight, suggesting a second day of gains could be in sight on Wall Street later.

Other market stress indicators continue to flash red. The CBOE Volatility Index remains high and above 30. Credit Suisse stocks and bonds hit record highs on Monday as concerns over the bank’s restructuring plans swept through markets, although some of those losses reversed on Tuesday.

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

“Greater volatility is almost certainly assured as currency markets refocus on U.S. recession risks, which continue to build,” said ANZ chief economist Miles Workman, the data on the US employment on Friday being the next major data point on the horizon.

Oil held on to overnight gains on news of possible production cuts, and Brent futures rose 43 cents for the last time at $89.29 a barrel.

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