British Prime Minister Liz Truss takes office and wants to revive the British economy drastically, but unexpectedly, the radical tax cut plan triggered a major earthquake in the UK capital market, the pound plummeted and set a new historical low, the British Treasury bonds staged a "big collapse", and pensions are on the verge of collapse. In order to avoid a bigger crisis, the Bank of England had to take action to rescue the market .
Although the Bank of England announced unlimited bond purchase operations, the epic financial crisis in the UK has temporarily calmed down. However, the crisis exposed the global vulnerability to combat inflation, causing concerns about a new round of global financial crisis.
" fear is contagious ," said Ben Kumar, senior strategist at Seven Investment Management LLP. "The selling of (pension) funds has exacerbated the fluctuations in the UK's Treasury bonds, causing the pound to sell out due to instability, triggering the outflow of UK assets, and thus triggering the global (asset) to suffer a parallel sale of ."
At the same time, the global market also issued a warning signal. Volatility in global currency and bond markets has soared to its highest level since March 2020, an indicator shows. In addition, Bank of America 's global cross-asset market risk indicator has also jumped to its highest level since the outbreak of the epidemic.
US financial market also sent a signal of collapse. With the third consecutive violent rate hike, the recession panic intensified. US stock 's decline has ranked third in history since the beginning of this year.
Former U.S. Treasury Secretary Summers warned on Thursday that market risks today look surprisingly similar to those that occurred before the 2008 financial crisis, and that the UK crisis could spread globally.
Global market volatility is intensifying, inflation concerns are spreading, Federal Reserve Radical interest rate hikes affect spillovers... A new round of global financial crisis that has been recorded in history may be brewing.
The UK has a "shocking week", and greater turmoil may be brewing
On September 23, the British government launched the largest new tax cut policy since 1972, but did not specify how to raise funds. What made the market even more worried is that tax cuts will increase the fiscal deficit and intensify the market's concerns about the UK's "fiscal dominance" and inflation risks.
Tras' ambition to promote economic growth is completely different from Central Bank's policy stance to control inflation. The outside world believes that this is a gamble between Britain and history and the future, and betting on not only whether the new plan can succeed itself, but also the economic prospects of the entire UK.
For a time, the British market fell into turmoil, the pound against the US dollar fell to a record low, the British Treasury bonds were sold sharply, and the British pension faced a large-scale requirement for additional margin .
In order to stabilize the market, the Bank of England temporarily launched a £65 billion bond purchase plan, and launched a "loose" distortion operation while raising interest rates and tightening QT.
The Bank of England's emergency intervention avoids a financial disaster that could be triggered by pension funds' massive sell-off of UK Treasury bonds.
market stabilized rapidly, with long-term bonds reversing the trend and showing the biggest gain ever, , while pound rebounded from a record low on Friday, trading above $1.12, the biggest single-week gain since 2020.
However, under the brief calm of the British market, a greater turmoil may be brewing .
One indicator shows that sentiment towards the pound is still very bearish. The technical indicator used by traders to measure the strength of their willingness to buy pounds - the Fear and Greed Index, is at the most bearish level since the UK's referendum decided to withdraw from and EU in 2016.
The Bank of England's restarted asset purchase plan will only last for two weeks, and the market expects the Bank of England to continue to raise interest rates in the coming months. Trass' firm stance on the tax cut plan is destined to be a sword of Damocles hanging above the market.
analysis believes that even if the pound falls to parity against the dollar is avoided, it may not last long unless Tras makes a 180-degree turn on its tax cut plan worth about £45 billion.
For the UK, it is already a storm that is coming and wind is filling the building.Not only that, the UK may fly out of the next Black Swan . On October 21, the world's three major rating agencies, S&P and Moody's will re-evaluate the British government's credit rating.
Moody's has labeled the largest tax cut in 50 years as a "negative" assessment label, believing that the move will threaten the UK's credibility in investors' minds, but Moody's has not downgraded the UK's rating outlook to negative. S&P took the lead. Although it maintained the UK's AA/A-1+ sovereign rating this Friday, it has downgraded the rating outlook from "stable" to "negative".
credit rating downgrade will put pressure on the UK's foreign debt and may affect the economic outlook. If fiscal situations continue to be tight, the UK's sovereign credit rating may be downgraded.
The contradictions faced by the UK. Other countries cannot escape
It is obvious that the fuse of the UK financial market this time was that after the Bank of England announced the second consecutive rate hike of 50 basis points, the British Treasury announced the largest tax cut plan in half a century, igniting market concerns about inflation.
British public opinion on the large-scale tax cut plan was booming, but Trass still did not look back and still insisted that he would stick to the large-scale tax cut plan to the end. On the other hand, UK regulators are busy holding meetings with investors to prevent the financial turmoil and from breaking out again. The British Chancellor is also busy explaining tax cuts to Wall Street banks and global investors.
The entire process exposed the rapidly intensifying contradiction between UK monetary policy and fiscal policy, and the contradiction between balancing inflation and economic growth. The two contradictions of , especially the latter, cannot be avoided by central banks around the world.
In response to this, Dan Suzuki, deputy chief investment officer of Richard Bernstein Advisors, said:
The collapse of the UK policy has always been an important driving force for recent market actions. "In view of the strong similarity of macro factors most markets face - high inflation, slowdown in growth and tightening of monetary policy, investors often extrapolate new policies from one market to other markets. Seema Shah, chief global strategist at Principal Global Investors, told the media that the market for the Phnom Penh bonds (UK Treasury) is unique to the UK, but inflation is not, and concerns about inflation are spreading around the world.
In the United States on the other side of Atlantic , the real yield of the U.S. 10-year inflation-protected Treasury bond (TIPS) hit its highest level in twelve years this week. Investors bet that inflation pressure will force the Fed to maintain high interest rates for the foreseeable future.
The United States is also increasingly worried about the turmoil in the UK market. On September 29, the Biden administration was shocked by the market turmoil caused by the British government's economic plan and managed to encourage Prime Minister Tras' team to reevaluate its massive tax cut plan . IMF slammed the plan and said it was "closely watching" developments in the UK, warning that the "untargeted" package may trigger a surge in inflation. Moody's aforementioned global rating agency, also warned the UK government that the unfunded tax cut program may lead to an expansion of the budget deficit and rising interest rates, lowering the UK's 2023 GDP growth forecast from 0.9% to 0.3%.
On the other hand, against the backdrop of high inflation and the Federal Reserve's continuous interest rate hikes, S&P has fallen by 25% this year, and the decline has ranked third in history (since 1931). Compared with the record high in January this year, the market value of the S&P 500 has evaporated by about $10 trillion.
Former U.S. Treasury Secretary Larry Summers also warned Thursday that market risks today look surprisingly similar to those that occurred before the 2008 financial crisis.
"We are going through a period of increased risks, just like in August 2007 people became anxious, and I think it should be a more anxious moment. Something is about to collapse, not only in the UK, but also in the US, which is a strange coincidence."
Starting from the UK, this round of crisis may spread globally
The UK market is highly integrated with other developed markets.As a major global financial center, the UK has invested trillions of dollars in assets in the United States and other global markets.
As the world's largest economy, the United States also affects the trend of global financial markets.
From historical experience, the Fed's tightening cycle often triggers global financial problems, the most obvious of which is the global financial crisis in 2008, and multiple rounds of emerging market crises, the financial market earthquake caused by the 1998 hedge fund long-term capital management collapse, and the implosion of the overnight lending market in September 2019. When loose money disappears, bad things will follow.
Since the Federal Reserve began hikes interest rates, the strong US dollar has caused pressure on other currencies, resulting in many countries being forced to follow the rate hikes, triggering a war to defend the local currency, but the result usually ends in "bloody flows."
Now it seems that the UK may be the first major victim of the Fed's aggressive interest rate hike.
In addition, 's global market trends are more synchronous than before, with one indicator showing that has a cross-asset correlation close to its highest level in 17 years.
Bank of England After the promise of unlimited purchase of long-term Treasury bonds, the pound recovered almost all lost land, but the cross-market volatility on the day was still high. From the whole week, the yield on the 10-year U.S. Treasury bonds has been fluctuating simultaneously with the UK Phnom Penh bonds.
In the view of Bank of America, as the pressure on the US bond market approaches the critical point, if the Federal Reserve does not adjust its policies, the risk of bond market failure will intensify and the situation will become uncontrollable. The United States will become the next UK by then.
Some people also think it is too early to worry that the UK crisis will turn into a global financial crisis. This will only happen when the UK sell-off wave starts to hurt U.S. bond markets.
In our opinion, it has exacerbated the lack of liquidity so far, but not enough to raise concerns about financial stability.
Sumers also admitted that there are not many signs that other markets in the world are "chaotic", but this situation may change in the blink of an eye, given the continued geopolitical tensions in , increasing uncertainty in the outlook for economic policy, continued high underlying inflation, and increased volatility in commodities.
He said that When a big country like the UK experiences something like this, it may have out-of-range consequences . He likens financial issues to tremors before earthquakes. He said that although the vibrations of sometimes pass, the reality is not always so lucky - this was the case in 2007. (Editor Wang Li)
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"Fear is contagious"
