City traders are shunning UK assets after the government’s tax and spending plans up-ended market sentiment toward the pound, stocks and government debt
(Picture: Alamy Stock Photo)The pound resumed its slump and shares tumbled today as some forecasters warned of a “doom loop” that could further hit Britain’s sagging economy.
Yesterday markets were relatively calm. Today they resumed their sell-off of UK assets.
The FTSE 100 fell 129 points to 6,855.75, with banks and retailers the worst hit.
A billion pounds in market value was lost from Greggs, Sainsbury, Ocado and Tesco alone.
Sterling fell 0.3% to $1.0692, though it is far from the only currency under pressure against the dollar and it is still slightly up on the record low of $1.03 reached on Monday.
The IMF said the UK government’s tax cut plans were likely to fuel inflation, an unusual intervention that increased market jitters.
The concern is that the Treasury and the Bank of England are pulling in opposite directions – the Bank trying to control inflation, the Treasury only sending it higher.
The IMF said: “It is important that fiscal policy does not work at cross purposes to monetary policy.”
Julian Jessop of the Institute of Economic Affairs, an adviser to Liz Truss, said: “It is correct to be concerned about the fall in the pound and the rise in long term interest rates, and there is a risk that we do end up in a doom loop of a falling currency, rising interest rates and weaker growth which obviously would undermine the agenda of the new government.”
He added: “But I also think that people have overreacted in the last few days in particular. If we step back a bit, actually almost all that the new government has done has been very positive and actually the sort of thing I would expect the IMF to welcome.”
The returns investors were demanding to lend to the UK continued to trade near levels more usually associated with countries with historically higher debt burdens and worse reputations over government stability and fiscal management.
The benchmark 10-year gilt yield eased marginally to 4.49%, leaving it near the 4.70% yield on the equivalent Italian debt. Greece’s 10-year bonds yield 4.9%.
Two-year gilts yields also eased, but stayed just over 4.5%. Shorter-dated debt is more sensitive to the outlook for monetary policy. Before the mini-budget up ended the market last Friday, two-year gilts were yielding 3.5%
Gordon Shannon, portfolio manager at TwentyFour Asset Management, said: “Paying attention to the bond market and considering its reaction to any policy decision was second nature to governments. That is no longer the case, but cabinet members will have to quickly relearn the skill if volatility is to be reduced and the outlook of the pound and UK assets as a whole improved.”
The Bank of England’s chief economist Huw Pill is warning that there will be “significant” increases in interest rates very soon. Bank base rate is presently 2.25%.
