UK tax cuts deepen sell-off, dollar rises and bonds plummet

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  • MSCI All-World hits 2-year low
  • Dollar hits new high in two decades
  • Sterling and gilts sell off after ‘mini budget’ in UK
  • Yen lower, but traders wary of more intervention
  • Treasuries heading for 8th weekly loss

LONDON, Sept. 23 (Reuters) – Shares hit their lowest level in two years on Friday, the dollar hit a two-decade high and bonds were sold again as investors feared bigger rate hikes are on their way to tame inflation, while British assets will move afterward. plummeted huge debt-funded tax cuts were announced.

UK assets were already weaker, but extended their decline after Britain’s new Chancellor of the Exchequer unveiled a historic tax-cutting agenda that will boost government borrowing. UK bond yields saw their biggest daily rise in decades, and money markets charged Bank of England interest rates as high as 5% in May next year. Sterling lost 2%. read more

Market sentiment has been gloomy all week, with major central banks spending an additional 350 basis points in rate hikes to fight inflation, Japan stepping in to support the yen and grim purchasing manager indices on Friday pointing to a widening slowdown in markets. the major economies.

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Interest rates were raised in the United States, Great Britain, Sweden, Switzerland and Norway, among others, but it was the signal from the Federal Reserve that high interest rates in the US were expected to last until 2023 and that led to the latest sale.

MSCI’s world stock index (.MIWD00000PUS) fell to its lowest point since mid-2020 on Friday, losing about 12% in the month or so since Fed Chair Jerome Powell made it clear that pushing inflation back would hurt.

The euro fell for the fourth day in a row after data showed the downturn in the German economy worsened in September as consumers and businesses face an unprecedented energy crisis and rising inflation. read more

European equities were a sea of ​​red for the second day, pressured by losses in everything from banks to natural resources and technology stocks.

The pan-regional STOXX 600 (.STOXX) fell about 2.2%, while the Frankfurt DAX (.GDAXI) lost 1.94%, making it one of Europe’s worst performing indices.

“Virtually anything but inflation data and central bank policy decisions is just noise right now, with the market firmly and almost exclusively focused on how high rates will rise in developed markets, and how long they will stay at those spikes,” Caxton FX chief strategist Michael Brown said.

S&P emini futures fell 1.15%, pointing to a weaker start on Wall Street later on.

The London FTSE (.FTSE) lost 1.9% against a backdrop of a 2% drop in the pound to another 37-year low, reaching as low as $1.1022 at one point.

“Typically looser fiscal and tighter monetary policy is a positive mix for a currency – if it can be financed with confidence,” said Chris Turner, Global Head of Markets at ING:

“Here’s the problem – investors have doubts about the UK’s ability to fund this package, hence gold’s underperformance.”

With US yields set to rise faster and stay high for longer, the dollar has hit a two-decade high, while benchmark yields on 10-year US Treasuries have soared as investors dump inflation-prone assets such as bonds.

The 10-year yield rose 5 basis points to 3.776%, again reaching an 11-1/2 year high and on track for its eighth consecutive weekly gain.

Euro-zone bond yields also rose sharply, with the Italian 10-year yield reaching 4.294%, its highest since late 2013, ahead of Sunday’s Italian elections.

The euro again marked its 20-year low, plunging to $0.9736.

The Japanese yen fell sharply on Thursday, until Japanese authorities intervened to buy the currency for the first time since 1998 and halt the long decline. read more

On Friday, the yen gave up some of its gains, with the dollar rising 0.4% to 142.97 yen per dollar. Few believe the yen’s rally will last given the Bank of Japan’s moderate stance.

Gold, which pays no interest, has come under pressure, especially over the course of this quarter, as yields have risen. It last fell 1.55% on the day at around $1,644 an ounce, at its weakest point in two years.

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Additional reporting by Tom Westbrook in Sydney Editing by Kim Coghill, Kirsten Donovan

Our Standards: The Thomson Reuters Trust Principles.

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