Stocks and sterling’s rally after UK tax cut provide some confidence

LONDON/SYDNEY, Oct 4 (Reuters) – Global stocks rose for the second day on Tuesday after Britain’s decision to drop part of a controversial tax cut plan and slightly higher expectations signs of aggressive central bank action have restored investor confidence.

Britain’s Finance Minister Kwasi Kwarteng announced on Monday that the government was backing away from rescinding a tax break for high earners that was part of a package aimed at boosting growth.

This measure is only a small part of the £45 billion in unfunded tax cuts that have sent the pound crashing to record lows and wreaking havoc on the gilt market.

But that was enough to quell some of the recent angst in the market and, along with the Bank of England’s emergency bond buying, the pound was expected to make up for most of the losses suffered since the unveiling of the mini -budget on September 23.

Adding to the sense of relief among investors, who endured one of the most volatile quarters in recent history in the three months to September, Australia’s central bank raised interest rates far less than expected. .

A weaker reading of US manufacturing activity helped temper expectations of larger rate hikes by the Federal Reserve.

However, some analysts said that optimism could be misplaced.

“My belief, however, is that it will not. Although technically having a dual mandate, the Fed has effectively become a single-issue central bank; that question being to bring inflation back to the target of 2%,” he added. Michael Brown, chief strategist at CaxtonFX, said.

“Unless we see a few months of back-to-back improvement in inflation data, it’s hard to see any sort of pivot, with another 75bp hike remaining my base case scenario for the month’s decision. next. It’s hard to be long at risk with this on the radar.”

The MSCI All-World Index (.MIWD00000PUS) was up 0.8% for the last time on the day, while stocks in Europe enjoyed a decent rebound, with the Stoxx 600 (.STOXX) trading up nearly 2% and London’s FTSE (.FTSE) gaining over 1%.

The pound, meanwhile, gained 0.6% against the dollar to trade at $1.1390. The pound has risen more than 10% since the mini-budget.

The dollar slid against a basket of major currencies as the euro and pound rose and treasury yields fell in light of a change in investor expectations for the path of interest rates. American interest.

Benchmark US 10-year yields fell nearly 20 basis points on Monday, after rising above 4.0% last week. They were last down 7 basis points at 3.5795%.

“Remarkably, this decline was entirely driven by lower real yields, with inflation breakevens rising on the day, again a sign that investors are anticipating a much less aggressive reaction from the Fed,” said Deutsche Bank strategist Jim Reid. said in a daily note.

In holiday-thinned trade in China and Hong Kong, MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) rose 1.7%, driven by gains in Australia.

PROFIT WHILE IT LAST

After September, when global bonds saw one of the biggest selloffs in decades and any currency other than the dollar appeared to tumble, market watchers said a rollback, aided by a better sentiment in the UK market was not unusual, but would likely be short-lived.

“The about-face… won’t have a huge impact on the overall UK fiscal position in our view,” said John Briggs, head of economics and market strategy at NatWest Markets.

“(But) investors took it as a signal that the UK government could and is at least partially willing to reverse its intentions which have so disrupted markets over the past week.”

S&P 500 futures rose 1%, following a 2.6% rebound for the index (.SPX) overnight, suggesting a second day of gains could be in sight on Wall Street later.

Other market stress indicators continue to flash red. The CBOE Volatility Index (.VIX) remains elevated and above 30. Credit Suisse shares (CSGN.S) and bonds hit record highs on Monday as concerns over the bank’s restructuring plans swept away markets, although some of those losses reversed on Tuesday.

The Japanese yen hit 145 to the dollar on Monday – a level that prompted official intervention last week – and was last at 144.65, while the euro was up 0.6% at $0.9878 , about three hundred above last week’s 20-year low.

“Greater volatility is almost certainly assured as currency markets refocus on recession risks in the United States, which continue to develop,” said ANZ senior economist Miles Workman, the data on the US employment on Friday being the next major data point on the horizon.

Oil held on to overnight gains on news of possible production cuts, and Brent futures rose 43 cents for the last time at $89.29 a barrel.

Editing by Sam Holmes and David Evans

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