This week Rishi Sunak officially took over as prime minister, seen as a safe pair of hands, to start to restore confidence following the short but explosive Truss era. He faces quite a juggling act, needing to satisfy markets as well as the many hostile factions of the conservative party. His cabinet includes a few familiar faces from both Johnson and Truss governments, but with the Treasury now firmly on a sound money footing under Jeremy Hunt. The response has been positive with bond yields and sterling both heading in the direction of their pre-mini budget levels. The calm may not last however, with investors pinning an awful lot of hope on next month’s Autumn statement. Disappointment will be costly.

Elsewhere, fresh from criticising the UK, the USA is about to undergo its own political turmoil as early voting has begun for November’s mid-term elections. With Republicans widely tipped to regain Congress, it’s worth noting many prominent Republican candidates were full of praise for the Truss/Kwarteng budget and have proposed a similar course of action. We may yet get the chance to offer some helpful advice of our own. 

For the following stories, please click on this link*

• China – Xi Jinping consolidates power with a 3rd term as president
• Equities – Digital advertising seen as expendable
• Global: Strong US dollar supports US GDP, while ECB hikes rates

This week saw the conclusion to one of the most remarkable chapters in Britain’s political history. The end of Liz Truss’s premiership sadly does not mean an end to the instability she wrought on both the currency and bond markets. We now have a leadership election and, with no obvious unifying candidate in sight, the core problem of the disconnect between a sizeable chunk of MPs, the party membership and reality remains. This has so far finished off four prime ministers and there is little to suggest it won’t be fatal for a fifth.

Elsewhere we see many of the same difficulties manifesting themselves globally. External shocks like Covid, Ukraine and energy have caused inflation to go up a lot and central banks will ultimately need to cause a recession to bring it down. This means for the next few years there will be no convenient bond buying program that will allow governments to ignore their fiscal problems, although they will likely return eventually. While all nations will struggle to manage these difficult times, it would certainly help if the government wasn’t actively trying to make things worse.

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• UK– Hunt shreds mini-budget to try and restore confidence
• Inflation – CPI driven back above 10% by soaring food prices
• Equities: Big brands continue to pass rising costs on to customers

(*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.)

This week we saw the lady is for turning after all. Growing opposition on the Conservative backbenches, international criticism and extremely hostile financial markets forced Liz Truss to sack Kwasi Kwarteng as chancellor and rethink plans to cut taxes. The government has been in damage limitation mode all week as it tried to reassure its critics that a bit of economic orthodoxy is not too bad after all. News that Kwarteng had to rush back to London for a crisis meeting on the fate of his mini-budget saw sterling rise and brought some calm to the gilt markets.

The reputation of the Bank of England also took a hammering this week, as it appeared to be briefing against its own governor at one point. Andrew Bailey gave pension schemes until the end of the week before the bank withdrew its support for the gilt market but this appeared to have little effect. Instead it was speculation about a government U-turn that was the catalyst for the end of this week’s gilt sell off. A new chancellor (Jeremy Hunt) and revision of the planned tax cuts may have calmed markets but the severe damage to Liz Truss’s credibility will be harder to reverse. 

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• UK– Bank of England and Treasury battle for credibility
• US – Rising core inflation causes wild day for markets
• Equities: Government plans to curb renewable energy profits

(*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.)

This week we saw the prime minister and chancellor stick to their guns for all of 10 days before giving in and scrapping their plan to scrap the 45p rate of income tax. This helped deliver a modest recovery in UK assets but was not enough to lift the FTSE or gilts back to the levels they traded at before the announcements. The U-turn highlights the weak position that Liz Truss and Kwasi Kwarteng are in – without solid support either inside or outside parliament – and makes the government more vulnerable to other rebellions. The difficult week led one analyst note to conclude that foreign investors will view the UK as uninvestable while there is such chaos in the government.

Meanwhile, the energy crisis is back in the news after OPEC decided to cut output and take advantage of the opportunity to bank profits while they can. The move has reversed some of the recent decline in the oil price. But it seems very short term as a higher oil price means higher inflation, which means more aggressive interest rates hikes, which increases the chance of a deep recession and means less demand for oil.

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• UK– Kwarteng’s UI-turn helps calm markets
• Oil – OPEC+ cuts production to offset economic slowdown
• Inflation: Retailers feel different effects of rising prices

(*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.)

Last week saw a ‘mini-budget’ delivered by the Chancellor.

It’s been widely reported but in summary there were a series of tax cuts for both companies and individuals. Markets had largely expected a modest to moderate easing adjustment to the UK tax system; Kwasi Kwarteng was far more aggressive with the fiscal easing. This has resulted in investors reassessing the UK’s fortunes and sterling and UK government bonds reacted accordingly.

It wasn’t just the UK that fell. Most markets and asset classes are in decline as interest rates rise around the world. Rates are rising sharply for the first time in a long while. Investors have enjoyed a good run since the global financial crisis, with the odd dip over time. Investing requires you to take risk, and that means investments will sometimes fall in value. How long it will be is hard to tell, but over time, the cycle will progress and mature.

Key Points:

• Sterling and gilts have fallen sharply after new chancellor Kwasi Kwarteng announced wide ranging tax cuts
• Sterling and most developed market currencies have been under pressure from a very strong dollar
• Financial markets are concerned about the rapid rise in the amount of new gilts that may be needed to pay for the tax reforms, in addition to the cost of the energy cap
• Inflation is beginning to show signs of slowing down
• The government’s energy price cap should act to significantly reduce headline inflation
• Falling energy costs could dramatically reduce the cost of the energy cap and ease government borrowing requirements.

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• The Markets’ response
• The impact of the energy cap
• The role of bonds and gilts in our portfolios
• How can we succeed in an inflationary environment
• Bonds have fallen, but equities have held up

(*Please note: We are grateful to Edward Margot, Head of Client Investment Strategy at FE Investments, for the contents of this e-shot. 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.)