Gilts tumble as Kwarteng’s mini-budget ushers in vast additional borrowing

This week we saw Liz Truss go back to the future as she dusted off Margaret Thatcher’s policy solutions to try and fix the UK economy.

Truss and chancellor Kwasi Kwarteng have opted for huge tax cuts as their method of jolting the UK into growth and these policies come straight from Thatcher’s playbook. However, the UK is no longer a high-tax economy with a very rigid labour market. Had Thatcher been in power today, would she have applied her 1980s’ policies to an economy that looks very different and faces a host of different problems?

Markets reacted badly to the chancellor’s announcements as gilts sold off sharply on the prospect of the huge increase in government borrowing needed to pay for the tax cuts. Equities have also fallen on the back of a drop in services and manufacturing output and depressed consumer confidence. Truss and Kwarteng are gambling that their tax cuts are strong enough to power the UK’s flux capacitor and generate sufficient future economic growth to cover their short-term cost. So far the time machine has managed to push sterling back to levels last seen in the early 80s.

For the following stories, please click on this link*

• UK– Kwarteng’s tax cuts send shock waves through markets
• Rates – Central Banks take concerted action to tackle inflation
• Currencies: Rising dollar causes problems around the world

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

Government bonds under pressure as pubs warn of last orders without assistance

This week the sell-off in government bonds continued on the back of not much more than a change in sentiment.

The outlook hasn’t really altered but investors are expecting both inflation and interest rates to remain higher for longer. The UK is likely to see a more severe downturn than other developed markets. However, Goldman Sachs’ prediction of inflation at 22% is based on gas remaining at last week’s eyewatering levels and it has already fallen 35% since last Friday. Goldman’s base case is for inflation at 14.8% – bad but not that much worse than previous forecasts.

Meanwhile the pub industry has joined the chorus of warnings about the severity of the energy crisis. Without the benefit of price caps, pubs renegotiating their energy supplies this autumn are facing huge increases to their bills but say they can’t pass on the rising costs to customers. Liz Truss is likely to be PM this time next week and we are about the see if she can stick to her campaign promise of no handouts. Boris Johnson has limited his help to suggesting people buy a new kettle to save energy, but no prime minister wants to be blamed for the death of the British pub. 

For the following stories, please click on this link*

• Global – Bonds tumble on expectations of more aggressive hikes
• Europe – Employment remains strong as inflation continued to rise
• Equities: Pubs call closing time without help with energy costs

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)