LONDON (Reuters) – Britain’s government bonds, currencies and stocks rallied on Monday as incoming finance secretary Jeremy Hunt reversed parts of Prime Minister Liz Truss’ economic growth plan in a crucial move to restore confidence after a market crisis.
Hunt said the tax changes would bring in £32 billion ($36.16 billion) in additional revenue a year as he sought to end the bond market turmoil caused by the government’s earlier plans.
He also said the government’s huge energy price cap would only last until April, after which the government would look at ways to help the most vulnerable households.
UK assets, which had rallied prior to Hunt’s statement, either gained or held on to gains.
Long-dated UK gilt yields, which move inversely with prices, remained lower following the statement. The 30-year UK bond was down about 40 basis points to 4.382% and the 20-year was last down a similar amount to 4.48%.
After the sharp drop on September 28th, when the Bank of England stepped in to stabilize the UK bond market after the turmoil triggered by the September 23rd mini-budget, they were set for some of their biggest daily declines.
While historically, the one basis point fall in yields would represent a huge rally for gilts, on Monday it only took them back to last week’s levels – a reflection of the tremendous market volatility of late.
The pound rose as much as 1.4% to a session high of $1.1332 following the statement. Most recently, it’s up nearly 1%, broadly where it was right before the announcement.
London’s FTSE-100 (.FTSE) rose 0.5% and the FTSE-250 (.FTMC) domestically focused mid-cap index outperformed its European peers, up 1%.
“Hunt walked the narrow gap between the political imperative and the economic imperative, and he did so well in that phase. We obviously already had a decent (market) reaction at open and the fact that we’ve continued to see gold (yields) fall makes sense,” said James Athey, Investment Director ABRDN.
“But we don’t think this really gets UK plc fully out of the woods. You’re still talking about an almost inevitable recession accompanied by high inflation. This looks like stagflation, which is a very uncomfortable place. The Bank of England is very busy.”
While the pound has roughly returned to pre-September 23 mini-budget levels, it remains highly volatile as movements in sterling and UK yields drive movements in other currencies and in government bond markets around the world.
Speculators increased their exposure to the pound by a fifth last week – the highest in two months, according to data from the Commodity Futures Trading Commission.
Investors, including hedge funds, increased their bullish bets on sterling for the first time since late September.
Reporting by Andy Bruce and Alun John, additional reporting by Harry Robertson; Edited by William Schomberg, Ed Osmond and Alex Richardson
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