October 17, 2022

“Sterling edged up cautiously this morning after Liz Truss’s partial reversal of her economic plan on fiscal policy on Friday. The widespread news also saw yields on UK government bonds fall, which suggests that financial markets are welcoming the prospect of changes to economic plans.”

Tim Hallinan – Trading Director

Main Headlines

President Joe Biden on Saturday called embattled British Prime Minister Liz Truss’ abandoned tax cut plan a “mistake,” and said he is worried that other nations’ fiscal policies may hurt the US amid “worldwide inflation.” Biden said it was “predictable” that the new prime minister on Friday was forced to walk back plans to aggressively cut taxes without identifying cost savings, after Truss’ proposal caused turmoil in global financial markets. It marked an unusual criticism by a US president of the domestic policy decisions of one of its closest allies.

Jeremy Hunt, the new UK chancellor, will this morning “torch” the bulk of his predecessor Kwasi Kwarteng’s tax cuts in an effort to calm markets, with ministers meeting later to discuss new spending curbs. The Treasury said that Hunt would at 11am announce plans to tackle the government’s deficit, two weeks earlier than planned, before making a House of Commons statement on Monday afternoon. The move is part of prime minister Liz Truss’s battle for political survival as leading business figures and Conservative MPs pile pressure on her to resign.

GBP

Sterling is well bid against most major currencies overnight. The pound gained against the dollar in early Asia trading after calls grew for the resignation of UK prime minister Liz Truss following a series of damaging U-turns on her government’s “mini” Budget. The first stage of the UK’s new HS2 high-speed railway is running “many billions” of pounds over its £40.3bn budget and the Treasury has asked for further potential cuts to the project. Jacob Rees-Mogg, has been accused of launching a “power grab” as new legislation proposes to hand sweeping control over the energy industry to the government.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. The European Central Bank is being purposefully vague on how far interest rates will have to rise to ensure inflation returns to the 2% goal, according to Chief Economist Philip Lane. The European Union ministers have been advised to take a tougher line on China and see the country as an all-out competitor with limited areas of potential engagement ahead of talks on revising Brussels’ strategy towards Beijing.

USD

The dollar is weaker than most major currencies in the early morning trade. The Pentagon is in talks with Elon Musk’s Starlink mobile internet system to keep connectivity for Ukrainian forces, after the billionaire Tesla chief complained he was burning through nearly $20mn a month funding the service. As Joe Biden weighs his response to Saudi Arabia’s decision to slash oil production, the US president faces mounting calls from Democrats to do the one thing they believe would hurt Riyadh most: freeze arms sales and curb security co-operation with the kingdom.

Markets

The pound rallied and UK bonds surged amid expectations that more of Prime Minister Liz Truss’s package of unfunded tax cuts may be reversed. US stock futures were higher with investors preparing for a number of key earnings reports. Chancellor Jeremy Hunt is due to make a statement later on Monday on measures to support fiscal sustainability, a UK official said. It’s the start of what may be a particularly torrid week for UK assets, with the beleaguered Truss battling to rescue her premiership after the Bank of England ended its emergency bond-buying program on Friday.

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

9:00 a.m.: Czech Republic Sept. PPI
10:00 a.m.: ECB’s Guindos speaks
10:00 a.m.: Italy Sept. CPI
10:00 a.m.: Bulgaria Sept. CPI
12:00 p.m.: ECB’s De Cos speaks
2:00 p.m.: Poland Sept. CPI
5:00 p.m.: ECB’s Lane speaks
9:00 p.m.: ECB’s Nagel speaks

Corporate Events

Earnings include BofA, BNY Mellon, Schwab, Sandvik
Paris Motor Show through Sunday

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