By Michiel Willems
Despite all the turmoil around UK politics last week, the pound ended up finishing the week higher for the third week in a row against the US dollar, while gilt yields closed lower.
It was set up to be another key week for the pound with the prospect of another Conservative party leadership contest however the unexpected decision of Boris Johnson not to declare his candidacy for the contest appears to have simplified the outcome, given the number of MPs who have already declared their support for Rishi Sunak.
With the only other challenger being Penny Mordaunt lagging behind, it’s quite likely that Rishi Sunak could well be elected unopposed and be Prime Minister by the end of the day.
“This also means that the prospect of a delay to the 31st October budget has receded, with all eyes set to be on UK gilt markets this morning, after the late yield surge at the end of last week, over concerns there might be a delay,” Michael Hewson, chief market analyst at CMC Markets in London, said this a.m.
“The recent political turmoil in the UK also prompted Moody’s rating agency to downgrade their outlook for the economy to negative from stable on Friday,” he stressed.
The report said that there were also risks to the UK’s debt affordability from likely higher borrowing and risk of sustained weakening in policy credibility.
“There was a time when this might have mattered pre-2008, however given the current economic and political challenges facing not just the UK, but the whole of Europe, the downgrade is unlikely to have a lasting effect,” Hewson noted.
Global markets
Even though European markets closed broadly lower on Friday, we still managed to see the third positive weekly gain in a row in the face of rising yields on both sides of the Atlantic, Hewson said.
US markets also saw a strong end to the week, recording their best weekly gains since June despite yields which have risen back to levels last seen prior to the financial crisis.
“Both the 2-year yield and 10-year pushed up to their highest levels in over 15 years, before slipping back sharply off their highs of the day,” he continued.
Hewson explained: “One of the main reasons for the late retreat in yields across the board on Friday, particularly in the short end, appears to have been a report on speculation that a November rate rise of 75bps might prompt a pause, or a slowdown in the pace of the Federal Reserve’s rate hiking cycle, from December.”
WSJ story
The sharp retreat in 2-year yields appears to have been prompted by a story in the WSJ, that suggested just such a scenario.
“While this may well have a very short shelf life, it nonetheless provided a decent end of week uplift, as we head towards the quiet period ahead of the next Fed meeting in the middle of next week,” Hewson said.
“The timing is also curious given recent comments from the likes of more dovish members like Neel Kashkari of the Minneapolis Fed, who as recently as last Thursday was saying that the Fed was in no position to pause on rate rises if inflation was still rising, even with the Fed Funds rate at 4.5 per cent.”
He said that jf some Fed officials are becoming uneasy with the current pace of rate increases and are starting to worry about over-tightening then they are disguising it well, because apart from Fed vice chair Lael Brainard, there’s been little evidence of it thus far.
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