A look at the day ahead in European and worldwide markets from Tom Westbrook
This morning at Balmoral Castle, Queen Elizabeth will meet with Liz Truss to form her government. She does this even though energy prices are going up and her narrow win in the Conservative Party’s leadership election is keeping the gilt market in a record-breaking mess.
The next few weeks are important if Britain is to avoid “extreme macro outcomes,” says Deutsche Bank (ETR:DBKGn) strategist Shreyas Gopal, and the same may be said across the Channel.
Related: UK Inflation Expert Warns BOE to Halt Rate Increases Prior to Recession
If the bond market doesn’t want to pay for Truss’s plans to cut taxes and help people with high electricity bills in ways that aren’t clear yet, the plans could cause inflation, be expensive, and be bad for the pound.
For five and twenty year gilts, August was the worst month since Refinitiv records began in the 1980s.
Sales have continued to rise, and if Truss stays the course on taxes—to quote one of her predecessors, Margaret Thatcher — the market still has potential to grow.
There is not much of a difference in Europe, where a German plan to spend 65 billion euros subsidising energy prices is equally unlikely to bring down wholesale prices.
Related: Gasma-geddon, according to Marketmind
The extent of the shrinkage thus far will be revealed by the PMIs in Britain and Europe later today. Then, after the Labor Day break, American businesspeople will once again be available.
At the same time, the headlines tend to gloss over China’s worsening issues. A decrease to the ratio of dollars banks need to keep is the latest indicator of dissatisfaction with the yuan’s drop, and the latest to offer little relief. The value of the yuan has dropped to levels not seen in two years.
MSCI’s broadest index of Asia-Pacific stocks was flat, and China’s new promises to help the economy didn’t move Asian markets.
Related: Marketmind: Hey ECB, how high will you go?
Rate increases are an additional burden. Australia’s central bank, the Reserve Bank of Australia, increased its cash rate by 50 basis points on Tuesday. The markets are pricing in a rate hike of 75 basis points from the Federal Reserve and the European Central Bank before the end of the month.
Chart: https://fingfx.thomsonreuters.com/gfx/mkt/movanejlnpa/gilts0502.png August was a terrible month for UK gilts.
Tuesday’s potential market-moving events include:
Preliminary Manufacturing Indexes for the United Kingdom, Germany, France, and the Euro Area (August)
U.S. Non-Manufacturing ISM
