The UK took centre stage on investment markets last week, as the fallout from the ‘mini-budget’ of the new conservative budget continued unabated (more info below). Before, we discuss the details any further – it has been announced this morning that the abolition of the 45% tax rate for high earners will not go ahead. Whilst the Prime Minister and Chancellor didn’t bow to economic pressure from the markets last week, they appear to have folded under political pressure on the sidelines of the Conservative party conference.
The economic pressures last week included a rebuke from the usually stoic IMF and an intervention into the gilt market by the Bank of England. The esoteric world of Defined Benefit liability driven investment (LDI) caused much of the worry. Certain DB schemes found themselves in a vicious circle of selling down assets to fund derivative margin calls, which in turn resulted in prices spiralling downwards once more. Sterling, the full UK gilt curve, and the wider UK stock market all suffered within volatile trading.
The fallout will continue to be analysed ad infinitum, with a plethora of technical papers to follow. However, once this appears clear – the ‘fiscal flexibility’ and ensuing political hubris of a negative interest rate environment doesn’t look like it’ll wash anymore.
As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.
Weekly Investment News
Last week’s most prominent development was undoubtedly the fallout from the announcement of the new UK government’s mini budget growth plan the previous Friday. Newly appointed Chancellor Kwarteng’s deficit-ballooning budget worried investors about the UK’s future fiscal sustainability. Sterling tumbled to a 37-year low of $1.0327 against the dollar on Monday as some of the largest tax cuts in 50 years were set to be enacted. Thirty-year gilt yields, rose to a 20-year high of above 5% on Wednesday, before dropping by more than 100 basis points (1%) after the BoE were forced to intervene by carrying out temporary purchases of long-dated gilts. The pound however held gains on Friday after a three-day advance, as investors speculated whether Liz Truss’ government would backtrack from their planned fiscal policies. This morning, after widespread opposition, Kwarteng U-turned on plans to scrap the UK’s 45% top rate of income tax.
Within the US, the S&P 500 Index headed for a third straight quarter of losses, it’s first since 2009, down nearly 25% YTD. Speaking on Wednesday, Federal Reserve Chairman Jay Powell reiterated the Fed’s inflation fighting message, ensuring that investors do not foresee a dovish pivot from the Fed anytime soon. This hawkishness continues to weigh on equities. On Thursday the US commerce Department reported that Inflation-adjusted gross domestic income, a key gauge of economic activity in the US, rose by a 0.1% annualized rate in the second quarter. This represents a sharp downward revision from the previously reported 1.4% gain.
Within the Eurozone a record high inflation print of 10% YoY was reported last week, as a result of the bloc’s supply side limitations. This puts more pressure on the ECB to hike rates over the coming months. The euro continues to weaken against the dollar trading at $0.981 as of Monday.
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