Markets scream into the sky ahead of new UK Prime Minister’s Mammoth Act

Bloomberg – A currency approaching its lowest level in decades, an unprecedented rise in government borrowing costs and a record poor performance by domestic equities: this is the gloomy market landscape awaiting the next British Prime Minister, Brittany.

The pound, which has already lost about 15% this year against the dollar, posted its worst monthly performance since the Brexit vote in 2016. Meanwhile, borrowing costs for businesses soared after six rises. Continued rate hikes by the Bank of England amid inflation warnings and spiraling out of control raised hopes for further hikes.

A business lobby group has suggested the country is already in the grip of a recession, pointing to rising energy costs. Falling household spending and real wages have sparked a series of strikes across sectors as the cost of living crisis begins to ease.

Once the winner of the leadership race – most likely Liz Truss – is announced at midday on Monday, investors will be watching to see if policies are mitigating or accelerating the decline in British assets. . Strategists fear the truce could borrow heavily for tax cuts, which would further damage the UK’s balance sheet.

“It will lift the economic slack in incredibly difficult times and there is already speculation – and some fragility in the pound – suggesting that it may drop the slack,” said Standard Bank’s Steven Barrow.

Here is a brief overview of what is happening in the UK markets:

pound sterling

After a steep decline this year, Cable is trading above $1.15, less than two cents below its lowest level since 1985. A momentum indicator called fear-greed means sellers are firmly in control the price. The weak pound increases the cost of imports, fueling already rising inflation.

state bonus

Interest rates on two-year government bonds soared above 3.1%, the highest level since the 2008 global financial crisis, dashing investors’ hopes that the worst of the selloff had passed. Swaps tied to the Bank of England’s monetary policy meetings show that rate hike expectations have risen, meaning the base rate will more than double to 1.75% before the end of the year.

UK stocks

The mid-cap FTSE 250 index, whose companies are heavily dependent on the domestic economy, is on track for its highest annual return against the export-based FTSE 100. Indeed, the high-end FTSE 100 continues to be supported by mining. and energy companies, which are reaping windfall gains from booming commodity markets, as well as exporters who are profiting from the weaker pound.

Tineke Fricki, head of UK equity research at Weverton Investment Management, said the benefits of any tax cuts by the new Prime Minister would be slow to materialize. “We need to beat extreme inflation expectations before we can see a trend reversal,” he said by email. “Next year could be better for the FTSE 250.”

The FTSE 250's annual underperformance is the largest ever against the FTSE 100

corporate debt

Borrowing costs for blue-chip UK companies have topped 5% for the first time in more than a decade as runaway inflation plagues the country’s corporate sector. The yield between sterling and dollar-denominated corporate bonds is the highest since 2014, reflecting particularly intense pressure in the UK.

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