Algebris’ global credit strategy team comments on the turmoil affecting UK assets, following the announcement of the massive tax cut plan last Friday from Chancellor of the Exchequer Kwasi Kwarteng:
“In the UK, the mini-budget aimed at reducing energy costs has turned into a massive fiscal expansion. The new British Chancellor and Treasurer, Kwasi Kwarteng, has added a reform of the income tax system, a cut in property stamp duty and a reduction in corporate taxes to the bill. The overall cuts are clearly aimed at top incomes, and the tone of the speech focused on prioritizing growth over redistributive concerns, as well as banker repatriation after the Brexit exodus. The size of the package is still unclear, but it could amount to £ 40 billion a year, in addition to the £ 60 billion planned for energy cuts. The total would be equivalent to a deterioration in the fiscal deficit equal to 5% of GDP ”.
“Furthermore, considering that the Bank of England (BoE) has just started Quantitative Tightening (QT), the offer of Gilt (British government bonds) could reach 7-8% of GDP in the next twelve months. The market has heavily punished UK assets, which is heading for strong fiscal expansion amid high inflation and rising interest rates. The pound fell below 1.06 against the dollar, a multi-year low, and 5-year gilt yields rose more than 50bps, breaking the 4% level. “
Algebris notes that “the market is putting increasing pressure on the BoE for an emergency rate hike, just two days after the central bank raised the policy rate by 50bps. Overall, we think the UK has shifted towards a fiscal expansion that is out of step with the current economic environment, as high inflation reduces room for fiscal slippage, and post-Brexit overall macro credibility has shrunk. reduced. We therefore believe that the market will continue to test authorities, and that UK assets will remain under pressure until the BoE makes a stronger hike, or the government comes up with a credible plan to restore the fiscal trajectory after the expansion. scheduled for 2022/23 “.
During the trading of the Asian markets, the pound fell by almost -4%, testing a new all-time low against the US dollar, at $ 1.0382. At the moment, however, it is up by 0.43% to $ 1.0899, probably betting on a new intervention by the Bank of England.
Both the FT and Bloomberg report rumors that the UK central bank would not have denied the hypothesis of issuing a statement later, in the day, on the trend of the pound.
However, the BOE has not yet decided whether the release will be issued today.