IMF Sound Alarm Over Government Fiscal Plans.

IMF Sound Alarm

The IMF have urged the government to reconsider their ￡47bn fiscal announcement, as the organisation contended that last Friday’s announcement would drive up inflation and slowdown growth, having adverse implications on market sentiment and economic stability further afield. The IMF are also keen to ensure that economies elsewhere do not announce similarly unfunded fiscal measures, which will undoubtably put huge strain on the global economy as the cost of borrowing surges and default risks rise. ????

With markets expressing uncertainty over Kwasi Kwarteng’s next major fiscal announcement on 23rd November, the IMF stated that this provided the “opportunity for the UK government to consider ways to provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners”.

The IMF also announced that "the nature of the UK measures will likely increase inequality," as criticism grows over lifting the cap on bankers bonuses and abolishing the additional rate of tax.

Gilt Yields Continue to Surge

Bonds continued to have a choppy session yesterday, with UK gilt yields continuing to increase across the board. The UK 10-year has seen its largest monthly increase since 1979 with yields rising some 1.45% to 4.5% as the two-year rises to it’s highest level in over 14 years (with it rising 26bpts yesterday). Two-year gilts are now well above double the level of mid-August as markets fear over the government’s finances and spending spree, with yields rising. The spread between the German 10-year Bund and UK 10-year has now increased to 2.16% - a meteoric rise from 1.3% earlier the month. Its worth noting that the German 10-year Bund yield rose to 2.25% yesterday, hitting a fresh 11-year high as Italy’s also rose to levels not seen since 2013 as it hit 4.8%. ?

This means that the UK 10-year yield is currently well above Ireland (2.91%), Spain (3.43%) and Austria’s (2.87%), while still remaining lower than Greece (4.95%) and Italy’s (4.75%).

The largest move in the gilt markets on Tuesday involved longer-dated debt, with the UK 30-year gilt yield rising as high has as 0.51 percentage points to 5.04%, its greatest level since 2002. Just last week we learnt that the UK is borrowing almost twice as much as expected in August as the cost of financing the UK’s ￡2.4tn debt continues to surge.

Across the Atlantic, the US 10-year Treasury went as high as 3.99% while two-year T-Notes went as high as 4.23% during yesterday’s session, slightly lower than the highs seen on Monday which represented the highest it’s been since October 2007.

Energy Update: Nord Stream Sabotage

In the gas markets, TTF futures are currently trading at around €210 per megawatt hour – up over 9.5% on the day and 135% on the year – as markets react to the news that Nord Stream 1 and 2 have been leaking, after been sabotaged by Russia, according to EU officials. While neither pipeline has been delivering any gas from Russia to Europe over the last few months, the news nonetheless sent gas prices soaring as investors weighed on the prospect of future supply side shortages and energy insecurity.

In the oil markets, WTI crude futures sank to nine-month lows yesterday as it fell below $77dpb yesterday. This comes as fears mount over the prospect of global economic downturn and investors speculate over a future slump in demand.

Further Pressure on Global Equities

Yesterday’s session saw further downward pressure on equities around the world as markets reacted to the turbulence seen in the UK, and risk off sentiment. For example, the S&P 500 closed down by around one per cent, with the Dow Jones closing around the same. The tech-heavy Nasdaq also a 1.2% depreciation. In Europe, the Stoxx 600 ended fairly flat after closing 0.1% down, though has fallen 1.2% this morning. Meanwhile, the FTSE 100 fell nearly 2% as investors continued to put pressure on UK markets. More generally, MSCI's index of stocks worldwide is down 6.3% on the month and some 5.8% in the last five days.

Meanwhile, Wall Street's VIX index (a broad measure of volatility) rose around 5% during the last 24 hours, as it neared levels not seen since October 2020.

DXY Continues to Rise

The DXY is hovering close to 114 this morning having risen around 1/3rd of a percent, as investors around the world continue to plough into the USD. The DXY is approaching fresh twenty-year highs as it surges on levels not seen since May 2002. It is worth noting here that the highs seen in 2002 were around 120, and one would have to go back to 1986 to see the DXY hit such highs (the peak here being 160 in 1985). ??