Gold and the British pound rallied on Monday after Jeremy Hunt, the UK’s new prime minister, rushed ahead with a plan to scrap most of his predecessor Kwasi Kwarteng’s controversial tax cut plans in a snap. efforts to calm financial markets.
The 30-year gold-plated yield fell 0.31 percentage points to 4.47%, reflecting higher prices and reversing part of a rally late Friday after investors decided prime Liz Truss didn’t go far enough by sacking Kwarteng and scrapping the £18 billion corporate tax cut.
The cost of government borrowing over 30 years is still much higher than the 3.75% seen before last month’s £45bn unrecovered tax cut sent markets into a tailspin and caused liquidity crisis in UK pension funds. Shorter gold-plated yields also fell sharply, while the pound rose 0.8% against the dollar to trade at $1,126.
Hunt will outline the government’s deficit-resolving plan at 11am in London on Monday, two weeks earlier than planned.
Gold-plated sales flared up again late on Friday as the Bank of England’s emergency market intervention ended, with the central bank buying just £19 billion of the potential £65 billion. of perennial gilts.
The BoE reiterated on Monday that the program has ended but a new short-term lending facility announced last week to help ease liquidity pressures at pension funds will continue until November 10.
Antoine Bouvet, rate strategist at ING, said on Monday the announcement from Hunt would ease pressure on the BoE to intervene more deeply in the market. However, investors are likely to remain concerned about the extent of UK government borrowing in the coming years and the need for the central bank to tighten policy to offset its inflationary impact.
“It will take an almighty fiscal tightening package to convince the market that the fiscal path is now sustainable and the BoE upside risks are mitigated,” Bouvet said.
The government’s latest turnaround follows growing calls from Conservative MPs and business figures for Truss to step down over the weekend, with several cabinet ministers looking to step up support for potential leadership candidates.
But the pound is still down about 17% this year and analysts have warned that UK government bonds remain vulnerable. Goldman Sachs on Sunday also cut its UK economic growth forecast and warned that it expected a more severe recession, with signs of “weaker growth momentum, tightening financial conditions”. significantly higher and corporate taxes higher from next April”.
Mansoor Mohi-uddin, chief economist at Bank of Singapore, said: “There is an expectation that if Truss is removed, it will draw a line under this financial difficulty and a new government will be possible. reassure the market and the public”. Bank branch of OCBC Bank.
But he added that Closing BoE . Gold Plated Purchase which means that if Truss refuses to step down, the pound will reverse its gains.
“The prime minister can move on and the markets will be volatile again, or if she is forced out, there could be a quiet period for a few days,” said Mohi-Uddin. But unfortunately, all the negative fundamentals are still in place. “
