On Wednesday, Bank of England Governor Bailey and three members of the monetary policy committee will face questions from MPs about inflation and interest rate outlook. At that time, they may be more clear that the Bank of England monetary policy is currently hesitant between 250 basis points or 75 basis points in September.
In analysts' view, high inflation, slowing economic growth and long political disputes have left global investors still deterred of British assets. Goldman Sachs predicts that if energy prices continue to rise, the UK's inflation rate may exceed 20% next year, which will put the UK in severe stagflation.
pounds and British bonds fell, and British stocks temporarily led
Just past August. Against the backdrop of intensified economic and political uncertainty, the pound recorded its largest monthly decline since the Brexit referendum in October 2016. The pound fell 4.6% against the dollar, and the pound fell nearly 3% against the euro. During the Asia-Pacific trading session yesterday, the pound continued to decline against the US dollar, reaching 1.1468 at noon.
For some time, the energy crisis has dealt a huge blow to British businesses and consumers, and the pound's August plunge is exactly what is the deteriorating UK economic outlook. Not only that, investors also expect that the new fiscal policy that Tras is about to announce may also bring further uncertainty, which will also accelerate their selling of the pound in August.
Tras promised in the campaign to introduce £30 billion tax cuts as part of a plan to support the UK economy in response to the deteriorating cost-of-living crisis. Analysts believe fiscal easing may reduce the likelihood of a recession in the UK later this year, but they also believe that fiscal stimulus of this scale may make it harder for the Bank of England to cope with the worst inflation in more than 40 years.
JPMorgan analysts pointed out earlier this month: "As the UK will take new fiscal stimulus measures as energy costs and consumer price index continue to rise, the cyclical headwind of the pound may intensify in the fall." George Saravelos, global head of foreign exchange research at Deutsche Bank , also said that the pound trend reflects investors' questions about whether the UK's fiscal and currency combination is appropriate and concerns about how this will affect inflation, which is correct. "The inflation pressure in the UK is becoming increasingly continuous and widespread, but what signal has the British government sent about inflation so far?" He questioned that the Bank of England is not as active or effective as the Federal Reserve or the European Central Bank in terms of inflation risk communication. And, in his opinion, "the foreign exchange market may have limited responses to radical fiscal commitments lacking financial support or extensive VAT tax reduction plans, and it is better to pound than to give subsidies directly to the relevant low-income groups."
Not only Tras' fiscal plan has caused concerns about the market. According to the latest news from foreign media, after taking office, Tras will also call for an assessment of the Bank of England's mandate and propose the possibility of setting a new money supply target. Simply put, Tras is considering limiting the Bank of England's independent decision-making on interest rates. Previously, Tras said: "The best way to deal with inflation is monetary policy. I have said that I hope to change the Bank of England's responsibilities to ensure that it will compete with some of the world's most effective central bank in controlling inflation in the future." This series of concerns among investors in
are not only reflected in the pound trend. In August, investors' selling of British Treasury bonds also exceeded that of other European powers such as Germany. After this round of sell-off, the 10-year UK Treasury yield has soared from 1.8% in early August to 2.918%, and the 2-year UK Treasury yield rose above 3% at the end of August, the highest level since 2008. Yesterday, the Asia-Pacific trading period continued to rise to 3.1320%.
However, UK large-cap stocks are an exception to all kinds of assets in the UK. The FTSE 100 Index (FTSE 100) is one of the best-performing stock indexes in developed countries this year, falling only 1.4% in pound, while the S&P 500 Index fell 17% during the same period, and the stock indexes of some other European countries also fell around 2% this year. Some analysts pointed out that this is related to the fact that most of the companies in the FTSE 100 component are making profits in the US dollar and other currencies, which also includes energy companies that performed well during the commodity boom this year.
bond and foreign exchange prospects are bearish
As the above uncertainties and risk factors will continue to exist, analysts and investors continue to be bearish on UK assets.
Analysts of the Bank of England said in a report that if Tras questions the Bank of England's independence, it would "be a significant disadvantage to the pound." In addition, Trass' policy may also lead to intensifying tensions between the UK and EU . In the worst case, the EU could end the free trade agreement, which could trigger a trade conflict. In addition, there is currently speculation that Tras may trigger Article 16 to overturn the Northern Ireland agreement in the Brexit agreement. All of these will lead to further declines in the pound.
Mitsubishi UFE analyst Derek Halpenny said that Bank of England officials may suggest a larger rate hike of 75 basis points in their speech on Wednesday, but that will not bring too much support to the pound. The Bank of England's statement may help curb the pound's sell-off and provide some potential for recovery, but this is only temporary. Because, in the final analysis, being forced to raise interest rates significantly in the face of a weak economy to resist the inflation risks associated with the exchange rate , this is actually not a favorable combination.
In the UK Treasury market, the short bets (in terms of value) of 2-year UK Treasury bonds, which are most sensitive to interest rates, have risen by 79% this year, according to data from S&P (SP Global Market Intelligence).
Blackburn sold some of the U.K. Treasuries in its portfolio before the Bank of England's last interest rate meeting, and instead bought bonds from other countries whose inflation is about to peak. He said: "At least in the short term, the prospects for UK Treasury bonds will not be much better."
Some fund managers even shorted longer-term UK Treasury bonds in . Crispin Odey, the founder of Odey Asset Management, has been shorting some long-term bonds, including 30-year UK Treasury bonds for some time, as he expects UK inflation to remain high "for at least a few years." Mark Dowding, chief investment officer of BlueBay Asset Management, also predicts that U.S. inflation has peaked, euro zone inflation will peak before the end of the year, while U.K. inflation will continue to climb. To this end, he bet on the steepening of the yield curve of the UK Treasury bonds while shorting the UK Treasury bonds.
Even for the UK stock market, which has performed better than other developed markets, investors are reducing their holdings. According to Bank of America , large international investors reduced their exposure to the UK stock market in July, with 15% of global fund managers reporting “slashing” positions in UK stocks.
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