Economy

Investors say that Britain’s new PM Sunak will not be allowed to take advantage of the markets.


© Stocksak. FILEPHOTO: Skyscrapers seen at Canary Wharf in London, Britain, October 26, 2015. REUTERS/Reinhard Krause

By Alun John & Harry Robertson

LONDON (Stocksak), – Investors welcomed Rishi, Britain’s new prime Minister, on Monday. However, they are likely to give him little room to diverge from spending restraint or tax rises after his predecessor discredited their faith in the Conservative party’s economic management.

Sunak will be Britain’s next leader, and the third in as many months, after he defeated ex-prime Minister Boris Johnson and Penny Mordaunt to win a race to head the ruling Conservative Party.

Sunak’s rise as head of the government bond market seemed to have been welcomed by the markets. The benchmark 10-year gilt yield fell 30 basis points to 3.75% Monday. Prices rise, yields fall.

British financial markets were in chaos after Liz Truss, the outgoing prime minister, spent a month and a quarter in power. Kwasi Kwarteng (her finance minister) planned for massive unfunded tax reductions. This caused a spike of gilt yields, which shook the country’s retirement system and forced the Bank of England into action.

Paul Donovan is chief economist at UBS Wealth Management. He stated that the fall in gilt yields over the past few days indicated that markets are no longer charging the UK a “credibility premium”.

Donovan claimed that Sunak won’t have much room to make bold choices due to the chaos of last month.

He stated that “the credibility risk is not zero.” “A lot of what could be called economic soft power was destroyed in the events that took place over the past two weeks.”

“There will be times when it is beneficial to have a little flexibility in market reaction. I don’t believe the incoming prime Minister has that.

MORE SCRUTINY

After hitting a record low at $1.0327, the pound has recovered quickly. This was in response to Kwarteng’s budget. It last traded around $1.1283. It has lost 17% against the dollar and 4% towards the euro this year.

Analysts stated that the British government had much to do before investors could feel confident about their return to the UK.

“You can not immediately go back where you were a few weeks ago,” Michael Michaelides, Fixed Income Analyst at Carmignac in Paris, said.

“When you introduce unpredictability, you must spend more time to examine it because you must understand the risks better, which requires a premium.”

Michaelides stated that to regain trust with the markets, tax increases would need to be combined with realistic and politically feasible spending restraint. He said that if the government wanted to offer gas price cuts or help consumers with taxes, they would need to “fully coasted” with a plan to quickly pay for them.

It won’t be easy. It will not be easy. High inflation means that government budgets for healthcare and defense are being squeezed. The Bank of England expects a recession by year’s end. Sunak is leading a party that wants to get rid of its leaders.

GLOBAL MARKET PRESSURES

International investors will find some relief in this: If they aren’t in the UK, they probably won’t need to worry about British politics. This is a stark contrast to the days after Kwarteng’s budget.

“The UK government craves influence on the world stage – well we finally got it, we were pushing global markets around, for a little while the chaos in the gilt market was pushing Treasury and Bund yields up,” said Paul Jackson, global head of asset allocation research at Invesco.

“The settling down in the UK means that what is occurring in politics is now more of a idiosyncratic event just affecting UK market, and in the UK too, what global market are doing will be more and more important.”

Sunak won’t take much comfort from this notion.

Intensifying interest rate hikes by central banks is increasing pressure on property markets. The Fed’s hikes are causing a lot of pain by driving up the dollar and weighing down currencies like the pound.

The big picture is that Sunak has taken charge of a country in energy crisis and is likely headed for recession. Inflation is also stuck in double digits. Even without the spectres of the markets overhead, it’s an unenviable inheritance.

News Source and Credit

Stocksak Editorial

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