Kwarteng’s cuts clobbers sterling
The British pound is taking a hammering as the new Chancellor of the Exchequer, Kwasi Kwarteng, announced tax cuts to stimulate the economy. In recent months, there have been growing concerns about the UK economy, as economic activity has cooled, inflation has hit a 40-yeaer high, and interest rates are rising. UK government debt is already high, and the energy support scheme will mean that borrowing will jump again. A few hours ago, Kwarteng, announced tax cuts, which in the near-term will reduce tax receipts, and that will lead to even more borrowing. Currency traders are starting to question the UK’s ability to service its debt repayments, and that is being reflected in the rise in government bond yields - the higher borrowing cost indicates the perceived increased risk associated with lending money to the British government.
Sterling is in the firing line as traders are turning their backs on all things British. There is a creeping feeling the extra government borrowing that is in the pipeline will severely weigh on the UK economy. GBP/USD has plummeted, largely down to the weakness in the pound, but by contrast, the US dollar is rallying on account of the flight to quality play.
Stock markets are enduing large declines because of the tick higher in government bond yields. In the past few sessions, we have seen rate hikes in the US, the UK, Switzerland and Sweden, and the lifts are hurting equities. Lately, there has been an increase in bearish sentiment, and those feelings have become more apparent. It feels as if the world economy is heading towards a storm of falling growth and higher costs. Industrial commodities are often viewed as good barometer for global demand, and silver, copper, WTI and Brent crude are all showing huge losses, so that highlights the tepid mood in the markets.