UK bonds rise on hopes of fiscal turnaround, Wall Street set to open higher

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LONDON — Britain’s government bonds rose on Friday on speculation of a reversal in the country’s fiscal plans, while U.S. stock index futures signaled a higher open on Wall Street after major bank earnings Americans, after a meteoric rise in equities in the previous session.

The yen hit its lowest level in 32 years against the dollar for the second day.

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The Bank of England has had to intervene to stabilize government bond, or gilt, markets in recent weeks after the market spooked by unfunded tax cuts announced in a ‘mini budget’ last month. last.

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Britain’s Finance Minister Kwasi Kwarteng has been sacked after less than six weeks on the job, the BBC reported on Friday as Prime Minister Liz Truss set to cancel parts of her economic plan.

Truss will hold a press conference at 13:00 GMT. .

“A good mood is coming from the bond markets – finally yields are trending lower, mainly driven by the UK, where there are these rumors there is going to be a major policy reversal,” said Matteo Cominetta, economist at the Barings Institute of Investment.

“The mini-budget could not have been more inconsistent with the anti-inflation policies that are underway around the world.”

Yields on UK 10-year bonds, which move inversely to price, fell 24 basis points to 3.96%.

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US 10-year bond yields fell 5 basis points to 3.90% and German 10-year government bonds fell 11 basis points to 2.19%.

S&P 500 futures rose 0.12%, paring earlier gains, after JP Morgan, Morgan Stanley and Wells Fargo reported lower third-quarter earnings.

US stocks had a roller coaster session on Thursday after core US inflation – which excludes food and fuel prices – beat forecasts at 6.6%, the largest annual increase in 40 years.

After an initial sell-off, stocks surged in a technical rebound as investors hedged short bets.

The MSCI global equity index gained 0.6% on Friday, recovering from 2.5-year lows in the previous session, but heading for little change over the week.

European stocks hit a one-week high and rose 1.4%. Britain’s FTSE rose 1.1%.

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Following the high US inflation report, markets have now fully priced in a 75 basis point hike from the Fed at its November meeting and a 71.5% chance of another giant rate hike. in December.

Futures also suggested rates would now peak at 5%, taking them to levels not seen since 2007.

Aggressive Fed tightening is putting pressure on central banks around the world to follow suit. Singapore’s central bank tightened monetary policy for the fourth time this year on Friday and warned more would be needed to bring inflation under control.

Global markets have been volatile as investors feared that rising interest rates could push major economies into recession before they got inflation under control.

Investors with classic “60/40” portfolios – 60% stocks, 40% bonds – face the worst returns this year in a century, BofA Global Research said in a note Friday, noting that bond markets continue to decline. see huge outflows of capital. .

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Investors are also awaiting an imminent deadline for the end of the Bank of England’s emergency bond-buying program, which relieved pressure on Britain’s two-trillion-pound pensions sector.

Simeon Willis, chief investment officer at consultants XPS, said that given the recent strengthening of gilts, pension plans should be able to tolerate a 50 basis point rise in yields before having to sell more assets. to fund hedging positions.

Another consultant said his pension plan clients could face another 200 basis point hike.

The Japanese yen weakened to 147.74 to the dollar, below the 145.9 level that prompted Japanese authorities to intervene last month to support the currency.

The euro hit 1-week highs against the dollar before falling 0.4% to $0.9732. The dollar index rose 0.35% to 113.

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The pound, which jumped 2.0% on Thursday on reports of a U-turn in the UK, fell 0.7% to $1.125.

MSCI’s broadest Asia-Pacific ex-Japan equity index rose 1.7%. The Japanese Nikkei jumped 3.3%, enjoying the best day since March.

China’s blue chips rose more than 2%, marking the biggest gain since August, after the country’s central bank governor pledged stronger support for the economy as COVID lockdowns spread ahead of the very important congress of the Communist Party from Sunday.

Oil prices fell in a choppy trading session as global recession fears and weak demand for oil, particularly in China, outweighed support from a steep target cut OPEC+ supply chain.

Brent crude futures fell 1.15% to $93.48 a barrel, while US West Texas Intermediate (WTI) crude futures fell 1.21% to 88.04 $ per barrel.

Gold fell 0.7% to $1,655 an ounce.

(Additional reporting by Stella Qiu in Sydney; Editing by Ana Nicolaci da Costa, Kim Coghill and Louise Heavens)