The UK case, with the Liz Truss government announcing the tax cut in the most ambitious country since the 1980s and the immediate collapse of the pound and the country’s government bonds confirm an unequivocal reality that is still struggling to be accepted: the markets do not forgive state gifts given without taking into account the fundamentals of the economy. All the more so in a context of terrific inflation and in the face of a debt-to-GDP ratio which, in the United Kingdom, has jumped to a three-digit number.
In fact, the relationship, already risen from 83% to 94% in the first months of the Covid-19 pandemic, it then jumped to nearly 104% in 2021, and is set to remain triple-digit until the end of the decade.
It comes to say spontaneously: Italy take note, especially now that it is preparing to be led by a center-right alliance led by Giorgia Meloni, known for having ranted against the European Union more than once.
But today it is not so much the BTPs that make the news, as much as UK government bonds, together with the pound, attacked by traders.
The pound plunged to a 37-year low on Friday, frozen since the announcement of the shock tax cut in UK. The market reaction against the pound continues to be relentless, so much so that, during the trading of the Asian markets, the British currency collapsed by almost -4% testing a new all-time low against the US dollar, at $ 1.0382. At 12.35 pm Italian time, the pound reduced losses, falling approximately 1% to $ 1.0732. The euro lost 0.40% to 0.9649.
Critics point out that the measures just announced by Liz Truss’ government’s new UK Finance Minister, Kwasi Kwarteng, will result in disproportionate and disproportionate benefits to only the richest, among other things, squandering the coffers of the United Kingdom and thus causing a surge in public debt levels, at a time, among other things, when interest rates are on the rise.
“It does not appear that the UK government is throwing the bone of a more moderate fiscal policy to the market, which leads me to predict that the resistance level will drop further for the pound. “commented Mazen Issa, senior strategist of the forexsenior division at TD Securities, in an interview with CNBC’s “Squawk Box Asia” program. “Below the $ 1.05 threshold, it is really moving towards parity“, Explained the strategist, adding that “We have seen the euro collapse below par (against the dollar. I don’t see why the pound couldn’t either.”
He was also interviewed by Cnbc Nicholas Ferres, chief investment officer di Vantage Point Asset Management, he pointed out “The great challenge” of the Bank of England, which will have to try to defeat inflation at the same time as the government tries to stimulate the economy, a factor in itself that translates into increased inflationary pressures. “The Bank of England could also hold an emergency meeting this week and raise rates. I wouldn’t be surprised if that happens “, Ferres said.
The economists of ING also speak of the BOE, pointing out that, “Since a U-turn of the newly announced fiscal measures is unlikely, many are foreseeing a squeeze on rates (UK) more significant by the Bank of England ”. “However – it is read in the report signed by ING – an increase to support the forex (thus the pound) may not be successful. The cable could touch parity soon, while the electoral victory in Italy of the center-right coalition could mean little for the euro“.
“Traders fear Liz Truss more than Giorgia Meloni”
It is not for nothing that the Bloomberg site opens with a page with the title in large letters: “Traders More Worried by Liz Truss Than a Far-Right Win in Italy”, or “’Traders are more concerned about Liz Truss than about the victory of the far right in Italy’.
The article reports the statements made by the leader of the Brothers of Italy Giorgia Meloni who, commenting in the early hours of today the victory of the Brothers of Italy at Italian political elections, he showed a more conciliatory tone, telling his supporters that Italy needs to be governed “With responsibility”. In the United Kingdom, however – Bloomberg remembers – Chancellor of the Exchequer Kwasi Kwarteng sparked a market crash last Friday, announcing the largest unfunded tax cut package in half a century. Not only that: Kwarteng said over the weekend that further tax cuts are on the horizon.
In addition to the 3.7% plummet against the dollar during Asian market trading, the pound lost as much as -1% against the euro to 1.1088. The sell off has made an encore also on Gilt government bondscausing a jump in ten-year yields of +29.4 basis points, up to 4.12%, against a rise in ten-year BTP rates which was limited to +9 basis points at 4.43%.
Gilts harassed by sales, do worse than BTPs
Both the Italian political elections and what is happening in the United Kingdom have been commented on by Paul Donovan, chief economist at UBS GWM who pointed out that, with the victory collected in the elections, the Italian right will not be able to change the Constitution. Also highlighted the fact that Giorgia Meloni’s Brothers of Italy party has promised to adopt a relatively moderate fiscal policy.
In the case of the United Kingdom, however, explains Donovan, “Tax cuts are unlikely to give significant medium-term support”, as the bottlenecks affecting the British economy affect the health and education sectors. Sure “There may be a short-term positive effect, but it will be something (precisely) limited “.
Donovan concluded today’s note dedicated to the markets by pointing out that, by a UK citizen belonging to the high income class, “A rational answer would be to increase savings, anticipating future tax increases “. To say: a maneuver in favor only of the rich, which will most likely also have to be withdrawn immediately, which makes it clear how, according to economists, Liz Truss’s government’s monster tax cuts plan is decidedly unsustainable for UK-made public debt.
The trend of the pound was also commented on by Walid Koudmani, Chief Market Analyst XTB.
“The British pound is in the spotlight today due to a large crash seen by the currency. The pound has been in free fall since Friday, following the announcement of new expansionary fiscal measures, including the largest tax cuts in decades. Although these measures aim to stimulate economic growth, there are concerns about their financing and their impact on inflation ”.
Koudmani actually pointed out that “The GBPUSD (cable) pair suffered a flash crash this morning, falling as low as 4.5% at one point in the Asian session with the pair dipping below 1.0350, the lowest level in history. This situation is not limited to the US dollar as the moves on other currency pairs linked to the GBP have also been huge. However, the pound managed to rebound from daily lows and in some cases, such as GBP-JPY (sterling-yen ratio), the downward movement has been almost completely canceled ”.
“The British pound – concluded the head of market analysts of XTB – is the worst-performing major currency today and, while in recent weeks we have seen general weakness of the majors against the US dollar, with the euro-dollar which remained below par, this reaction from the pound is worrying and could prove to be a harbinger of what the currency awaits as traders seek safer choices and as they remain uncertain how the BoE (Bank of England) and the government will attempt to address this situation as the risk of reaching parity with the dollar becomes more and more probable ”.
In the aftermath of the Italian political elections, the mention of the winner Giorgia Meloni of a sort of fiscal responsibility was enough to limit the damage to the Italian paper: the BTP-Bund spread is at 232 pointswhile the rates on ten-year BTPs, after hitting a maximum of 4.49%, now travel around 4.44%.
Traders are more afraid of Liz Truss than Giorgia Meloni, e they focus their disposals more on UK government bonds and sterling than on BTPs and the euro. (Lna)