September 29, 2022

“High volatility on currency markets since the BoE’s announcement of purchasing long-dated UK government gilts. The pound gained 1.5 per cent against many of its peers before falling back slightly. Looking ahead, the pound is once again the centre of attention as markets awaiting BoE policy maker Dave Ramsden’s remarks.”

Sam Cornford, Partner – Head of Trading

Main Headlines

A weakened but still formidable Hurricane Ian chugged across Florida toward the Atlantic seaboard today after thrashing the state’s Gulf Coast with fierce winds, torrential downpours and raging surf that flooded oceanside communities. Ian blasted ashore with catastrophic force yesterday afternoon as a Category 4 hurricane, packing maximum sustained winds of 150 miles per hour (241 kph), and quickly plunged the region’s flat, low-lying landscape into a scene of devastation. Ian’s winds, making it one of the most intense storms to strike the U.S. mainland in recent years, diminished significantly after nightfall. Within eight hours of its arrival, Ian was downgraded to Category 1 on the five-step Saffir-Simpson scale, with top sustained winds of 90 mph (150 kmh), the National Hurricane Center (NHC) reported.

The Bank of England has been forced into emergency action to halt a run-on Britain’s pension funds after the impact of Kwasi Kwarteng’s ill-received mini budget prompted fears of a 2008-style financial crisis. Threadneedle Street said the fallout from a dramatic rise in government borrowing costs since the chancellor’s statement had left it with no choice but to intervene to protect the UK’s financial system. The Bank was concerned that it threatened the financial health of Britain’s biggest pensions and insurance companies, which together manage trillions of pounds of people’s cash. In a reversal of a policy position announced on the day before Kwarteng’s fiscal event, the Bank said it was setting aside £65bn to buy bonds over the next 13 working days to ease pressure on pension funds and insurance companies.

GBP

Sterling is stronger against the dollar and weaker against euro this morning. UK Prime Minister Liz Truss has insisted that her chancellor Kwasi Kwarteng’s mini budget is the “right plan” and has “put this country on a better trajectory for the long-term”. But she admitted that higher growth “will not come overnight”, as she was accused by a former Bank of England governor of “undercutting economic institutions” with the mini-Budget, which has sparked economic turmoil. Sir Mark Carney warned that the government’s £45bn tax giveaway – the largest in five decades – was “working at some cross-purposes” with the bank, which was forced to make an emergency intervention in the gilt market yesterday to prevent a crisis in the UK’s major pension funds. The bank’s intervention – to purchase billions in 30-year UK government bonds – buoyed Sterling and offered some salve to a fractious mood in markets, but following a morning of trading in Asia the pound was struggling for support and was again down 1 per cent at $1.0776.

EUR

Euro is well bid against most major currencies overnight. Four European Central Bank policymakers today backed another big interest rate hike next month as euro zone inflation looked set for another record high, but they differed on whether it was time to think about mopping up cash from the economy. The ECB has raised rates by a combined 125 basis points over its past two meetings and promised further increases as inflation rises towards 10% and longer-term expectations edge above its 2% target. Strengthening the case for another 75-basis-point increase, data today showed inflation in Germany’s most populous state jumped to 10.1% in September – the most since the early 1950s. Although the euro zone central bank’s next policy meeting is almost a month away, ECB policymakers Peter Kazimir and Robert Holzmann have both come out in favour of a 75 bps rate increase while Olli Rehn listed 75 bps as one of the acceptable options.

USD

The dollar is weaker than most major currencies in the early morning trade. The president of the Atlanta branch of the Federal Reserve has backed a fourth consecutive 0.75 percentage point rate rise at the next policy meeting in November, while urging the US central bank to be “mindful” of geopolitical and economic turbulence abroad. The comments from Raphael Bostic come as the UK has become engulfed in a financial crisis after the government said it planned to implement £45bn of debt-funded tax cuts. Bostic said the Fed needed to be “mindful” of international developments but added that the US economy and financial system were well fortified. Given the strength of the US economy and persistent high inflation, he said his “baseline” is for the central bank to deliver another 0.75 percentage point rate increase at the next gathering of the Federal Open Market Committee in November, followed by a half-point adjustment in December.

Markets

Shares in the Asia-Pacific mostly rose today following a rebound on Wall Street overnight. The rally in the US came after the Bank of England said it would intervene in the bond market to stabilize conditions. The Nikkei 225 in Japan advanced 0.95% to 26,422.05 and the Topix index gained 0.74% to 1,868.80. Australia’s S&P/ASX 200 jumped 1.44% to 6,555. Overnight in the US, the Dow Jones Industrial Average popped 548.75 points, or 1.88%, to 29,683.74. The S&P 500 gained 1.97% to 3,719.04, staging a comeback after notching a new bear market low the previous session. The Nasdaq Composite was 2.05% higher at 11,051.64 at the close. European shares tumbled this morning as a host of companies, including Swedish group H&M, warned about the effect of rising inflation and costs on their business, dampening the mood ahead of the release of expected red-hot German inflation data. The continent-wide STOXX 600 index was down 1.7%.

Main Economic Data/Central Banks/Government (All Times CET)

9:00 a.m.: Spain Sept. CPI
9:00 a.m.: ECB’s Simkus speaks
9:00 a.m.: ECB’s Panetta speaks
9:00 a.m.: Riksbank’s Ohlsson speaks
9:30 a.m.: Riksbank Sept. meeting minutes
9:45 a.m.: ECB’s Centeno speaks
10:00 a.m.: ECB’s Villeroy, Knot, Elderson speak at Climate Conference
10:00 a.m.: ECB’s Rehn, de Guindos, Vasle speak
10:00 a.m.: Italy Aug. PPI
10:15 a.m.: ECB’s Elderson speaks
10:30 a.m.: Riksbank’s Ingves on panel
10:50 a.m.: ECB’s de Cos speaks
11:00 a.m.: Euro-area Sept. consumer confidence
11:00 a.m.: Italy to sell bonds
11:30 a.m.: ECB’s de Guindos speaks
1:00 p.m.: Riksbank’s Floden speaks
1:30 p.m.: BOE’s Ramsden speaks
2:00 p.m.: Germany Sept. CPI
2:30 p.m.: Czech Repurchase Rate
2:30 p.m.: US jobless claims, GDP, core PCE
3:00 p.m.: ECB’s Simkus, Muller speak
5:00 p.m.: BOE’s Tenreyro speaks
7:00 p.m.: ECB’s Lane speaks

Corporate Events

Shares in Porsche due to start trading in Frankfurt
Earnings include H&M, CarMax, Next, HELLA

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