Sterling slumped to a record low on Monday, and a renewed selloff in British gilts pushed euro zone yields higher as the fall out from last week’s fiscal statement in Britain roiled markets for a second session.
Share markets around the world also slid as concerns about high interest rates continued to put pressure on the financial system, though in a rare recent example of a news event having a smaller market impact than feared, reaction to Italy’s election result was muted.
The pound plunged nearly 5% at one point in Asia trade to break below 1985 lows and hit $1.0327. Moves were exacerbated by thinner liquidity in the Asia session, and the currency had last clambered back up to $1.072.
British finance minister, Kwasi Kwarteng, on Friday announced he was scrapping the country’s top rate of income tax and cancelled a planned rise in corporate taxes, on top of a hugely expensive plan to subsidise energy bills.
The euro, which fell to its own 20-year low on the dollar on Monday was nonetheless up over 1% on the pound at 90.21 pence, having been as high as 92.29 pence early in the day, its highest since Dec. 2020. ,
“The market is now treating the UK as if it’s an emerging market,” said Rabobank strategist Michael Every in Singapore.
“If this carries across into European trading you’re going to get at a minimum a public statement from the BOE threatening (action) and … a strong possibility that they have to make an inter-meeting hike, and a chunky one at that.”
The carnage was not confined to currencies. Five-year gilt yields jumped more than 40 basis points to their highest since October 2008, sending Euro zone government bond yields higher.
Germany’s 10-year government bond yield hit its highest since December 2011 at 2.128%, DE10YT=RR and Italy’s benchmark bond yields rose to their highest since 2013.
Those moves were in line with the overall picture, rather than an outsized response to Sunday’s election after which Giorgia Meloni looks set to become Italy’s first woman prime minister leading its most right-wing government since World War Two.
“There are no big surprises. I expect a relatively small impact considering that the League, the party with the least pro-European stance, seems to have come out weak,” said Giuseppe Sersale, fund manager and strategist, Anthilia Capital Partners, referring to a separate right-wing party lead by Matteo Salvini.
“The market knew this was how it was going to end, and will remain focused at this stage on economic growth, monetary policy tightening, and public finances, which remain a slippery slope for Italy.”
The pound’s plunge is only the latest unnerving move as investors’ skittishness strains global financial markets.
Two-year Treasury yields broke above 4.3% to a new 15-year high, and while moves in European share markets were less dramatic than bonds and currencies, Europe’s STOXX 600 index. STOXX slipped for the third straight session on Monday, falling to a new low since December 2020.
Commodity stocks (.SXEP) and mining (.SXPP) led the declines as these are particularly exposed to a recession.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was down 1.4% to a two-year low and is heading for a monthly loss of 11%, the largest since March 2020.
Oil and gold were under pressure due to the surging greenback, with gold hitting a 2-1/2 year low of $1,626 and Brent crude futures last down about 0.5% having earlier fallen to their lowest since January at $85.06 a barrel.
“There has been an economic logic at play, as central banks raised rates to drive monetary policy into restrictive territory, get below trend growth for a while, – a polite way of saying a recession – and then you get lower inflation,” said Samy Chaar, chief economist at Lombard Odier.
“The question is whether the financial world can go through that sequence. It feels like we are reaching the limit of that, things are starting to break, for example what we see with sterling.”
Markets Update I 26 September 2022