Europe heads higher as UK turns to nerves

  • European Markets Gain With UK Moves Helping Sterling, Gold
  • The Nikkei fell 1.2%, the S&P 500 rose after pulling back
  • The dollar is near 149 yen, and the market is wary of intervention
  • Chinese yuan falls after Xi’s speech in Congress

LONDON/SYDNEY (Reuters) – Europe’s stock, bond and currency markets rose temporarily on Monday, buoyed by relief that Britain’s new finance minister quickly stormed into the unfunded tax cuts that have led to turmoil in British assets this month.

Major markets in Asia struggled overnight, but the European STOXX 600 Index (.STOXX) made an early gain of 0.5% as the British pound and British government bonds rose in London. / GB / FRX

New UK Finance Minister Jeremy Hunt is due to make a statement at around 1000 GMT. He spent most of the weekend holding meetings and doing media interviews, suggesting that many spending plans by Prime Minister Liz Truss and his predecessor, will now be scrapped.

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Bank of England Governor Billy Hunt gave a vote of confidence on Saturday, saying they had an “immediate meeting of minds” on the need to reform public finances, with an estimated £70 billion ($78.72 billion) black hole.

Invesco’s director of macro research, Ben Jones, said volatility in the UK will remain a major focus for global markets.

“The hope is that Jeremy Hunt will be a more stable group,” he said, referring to the “comfortable rally” of the pound, which rose 0.75% at $1.1257, in the UK gold markets.

“But we still need to see some follow-up…and we still don’t know if Liz Truss will be there at lunchtime or at the end of the month.”

British 10-year bond yields fell 27 basis points to 4.06% in morning trade, while the two-year yield fell 12 basis points to 3.75%. .

Other European markets also benefited. The yield on German 10-year bonds fell 9 basis points to 2.27% after hitting 2.423% last week, the highest level since August 2011.

That was also despite two key European Central Bank policymakers making the case over the weekend to cut the bank’s balance sheet and after Friday’s US inflation data boosted bets for a rate hike from the Federal Reserve.

He wrapped

Overnight, MSCI’s broadest index of Asia Pacific shares outside Japan (.MIAPJ0000PUS) slipped 0.6% and returned toward last week’s low 2-1/2.

Japan’s Nikkei (.N225) is down 1.2% although Chinese blue chips (.CSI300) are up 0.4% ahead of GDP data due on Tuesday.

S&P 500 futures rose 0.4% after Friday’s sharp decline, while Nasdaq futures rose 0.3%.

While the S&P is losing sight of 25% from its peak, Bank of America economist Jared Woodard warns that the slide is not over as the world has been transitioning from two decades of 2% inflation to a time similar to 5% inflation.

“$70 trillion in ‘new’ technology, growth, and government assets priced at 2% world is as vulnerable to such secular transformations as ‘old’ industries like energy and materials, reflecting decades of underinvestment,” he wrote in a note.

“Rotating 60/40 agents and buying what is scarce — energy, food, energy — is the best way for investors to diversify.”

intervention hour

A fiery US consumer price report and rising inflation expectations have markets fully expecting the Federal Reserve to raise interest rates by 75 basis points next month, and that rate will likely rise again in December.

A large number of Fed policymakers are speaking this week, so there will be plenty of opportunity for hawkish news headlines. Earnings season also continues with Tesla (TSLA.O), Netflix (NFLX.O) and Johnson & Johnson (JNJ.N), among others, reporting.

Goldman Sachs (GS.N) also reported this week and the Wall Street Journal reported that the investment bank plans to restructure its largest business into three divisions.

In China, the Communist Party Congress is expected to give Chinese President Xi Jinping a third term, while there may be a reshuffle in top economic roles as incumbents approach retirement age or term limits.

“Investors have not fully understood that China will not be high growth anymore,” said Janus Henderson, emerging markets portfolio manager, Alice Kotney, who also expects the yuan to continue to weaken. “It’s not going to be 5%-6% per year growth, it’s going to be 2%-3%.”

In the currency markets, the dollar is still king as investors’ price in the US has peaked around 5%.

The yen took a particularly hard hit as the Bank of Japan stuck to its ultra-easy policy, while authorities held off on intervening last week even as the dollar raced past the 148.00 level to 32-year highs.

Early on Monday, the dollar rose to 148.73 yen and is heading towards the next target at 150.00.

The euro settled at $0.9733, after achieving a more stable performance last week, while the US dollar index slipped slightly to 113.20.

Rising dollar and global bond yields put pressure on gold, which remained stuck at $1,648 an ounce.

Oil prices have been trying to rebound, having fallen more than 6% last week as worries about slowing demand overshadowed OPEC’s plans to cut production.

Brent settled 90 cents at $92.55 a barrel, while US crude rose 84 cents to $86.45 a barrel.

(dollar = 0.8892 pounds)

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Mark Jones reports. Additional reporting by Wayne Cole in Sydney. Editing by Susan Fenton

Our Standards: Thomson Reuters Trust Principles.

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