Pound rebounds and government borrowing costs fall as Hunt fiscal statement looms
The pound and UK government bond yields have recovered in anticipation of a key statement from the new chancellor tasked with sorting out the fallout from the government’s disastrous mini-budget.
Sterling had fallen to a record low against the dollar at the end of September, after the short-lived then chancellor Kwasi Kwarteng unveiled the biggest programme of tax cuts for 50 years.
Mr Kwarteng, who was sacked on Friday after just 38 days in the job, paid the price for a giveaway that called into question the government’s economic credibility on financial markets.
The mini-budget led not just to a collapse in the value of the pound, but also prompted a surge in borrowing costs – forcing an unprecedented intervention by the Bank of England (BoE).
However, following the prime minister’s announcement on Friday that Mr Kwarteng had been sacked and that corporation tax would rise to 25% from April next year instead of being kept at 19%, there was a partial recovery for the UK currency and bond yields.
Mr Kwarteng’s replacement, former foreign and health secretary Jeremy Hunt, has since promised to win back the confidence of the financial markets by fully accounting for the government’s tax and spending plans.
Sterling gained 1.1% to hit $1.1294 on Monday at one stage and also made strides versus the euro when the Treasury revealed that Mr Hunt would deliver key parts of a medium-term plan later on Monday in support of “fiscal sustainability”.
The statement – released before UK financial markets opened – added that Mr Hunt met the BoE governor Andrew Bailey and the head of the Debt Management Office on Sunday night to brief them on the plans.
There would be a select few announcements brought forward from the medium-term fiscal plan that is due to be revealed on 31 October.
The bond markets also suggested an easing of the recent pressure, given additional concerns in some quarters after the BoE on Friday concluded its emergency gilt market support on Friday.
The Bank issued its own statement ahead of the open to say that its operations, aimed at helping pension funds battling higher collateral demands, had enabled a “significant increase in the resilience of the sector”.
It reiterated that other liquidity options remained available, if needed, to ensure smooth financing.
Any rises in government borrowing costs, through a gilt yield rise, would have reflected additional jitters.
‘Unruly pupils are still scheming to oust the beleaguered head’
But there was a downwards shift, with both the UK 20 and 30 year yields falling by more than 30 basis points in early trading.
CHANCELLOR SECURES SOME BREATHING SPACE
When markets closed on Friday, after a dramatic day that saw a chancellor sacked and a totemic economic policy junked, the verdict was troubling:
A sell off UK gilts had gathered pace before, during and after the Prime Minister’s press conference, and the closing bell could not come fast enough.
After Jeremy Hunt spent the weekend signalling a dramatic change in course to reassure the investors on whom confidence in the UK economy rests, the Treasury was plainly not going to take any chances on Monday morning.
That explains the pre-dawn announcement that the new chancellor would be bringing forward U-turns on Kwasi Kwarteng’s calamitous mini-budget.
The aim was to secure breathing space, a stay of execution from markets that could, had they continued to sense vulnerability, deepened the crisis and ended the fiscal repositioning before it began.
The need was all the more acute as this was the first Monday in a fortnight when the Bank of England was not acting as backstop to the gilt markets, its emergency intervention having been withdrawn on Friday, in part triggering the political meltdown that ended the week.
The response was precisely the one the Treasury and Downing Street wanted to see; the first move of UK gilt yields, a measure of the effective cost of Government borrowing, was down.
Yields on 10, 20 and 30-year bonds all moved down as trading began in London at 8am, a trend that if it lasts between now and 31st October, when the Office for Budget Responsibility delivers its calculation of the state of the public finances, has immense political and practical implications.
The gilt markets matter not just because they are an expression of confidence in a nation’s creditworthiness. Government bonds are the mechanism through which states borrow, and the less faith there is in your plan, the more it costs.
And those borrowing costs are central to the calculations the Treasury and the OBR are making. The UK has £2.4trn of debt and under the Truss plans was going to take on tens of billions more to fund tax cuts.
With market confidence evaporating (and gilt yields rising) the cost of that borrowing, old and new, rose. If yields can be brought down the cost of borrowing will fall, cutting billions from one side of the government’s balance sheet, which could in return reduce the need for cuts.
The next hours and days will be pivotal.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said other risk factors remained at play despite the initial recovery.
”New chancellor Jeremy Hunt has the air of a troubleshooting teacher brought in to turn around a failing school and faces his first big presentation test today with an emergency budget plan wheeled out to try and calm financial markets.
“This is all part of his charm offensive to instil confidence in the government’s ability to be fiscally responsible, but behind him unruly pupils are still scheming to oust the beleaguered head,” she wrote.
Can Truss remain PM?
It reflects a renewed focus on whether Ms Truss, the architect of the government’s initial economic strategy, can remain in the job.
A Tory MP told Sky News: “The idea that the prime minister can just scapegoat her chancellor and move on is deluded.
“This is her vision. She signed off on every detail and she defended it.”
The Conservative Party is now on its fifth chancellor in the past three years – Mr Hunt, Mr Kwarteng, Nadhim Zahawi, Rishi Sunak and Sajid Javid.
The world’s most valuable company, and first to be valued at $4trn (£2.9trn), beat market expectations in keenly anticipated financial results.
Microchip maker Nvidia recorded revenues of $46.7bn (£34.6bn) in just three months up to July, latest financial data from the company showed, slightly better than Wall Street observers had expected.
The company’s performance is seen as a bellwether for artificial intelligence (AI) demand, with investors paying close attention to see whether the hype is overblown or if significant investment will pay off.
Originally a creator of gaming graphics hardware, Nvidia’s chips help power AI capability – and the UK’s most powerful supercomputer.
Nvidia’s graphics processors underpin products such as ChatGPT from OpenAI and Gemini from Google.
Other tech giants – Microsoft, Meta and Amazon – make up Nvidia’s biggest customers and are paying large sums to embed AI into their products.
Why does it matter?
Nvidia has been central to the boom in AI development and the surge in tech stock valuations, which has seen stock markets reach record highs.
It represents about 8% of the value of the US S&P 500 stock market index of companies relied on to be stable and profitable.
Strong results will continue to fuel record highs in the market. Conversely, results that fail to live up to the hype could trigger a market tumble.
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Nvidia itself saw its share price rise more than 40% over the past year. Its value impacts anyone with cash in the US stock market, such as pension funds.
The S&P 500 rose 14% over the past year, and the tech-company-heavy NASDAQ gained 21%, largely thanks to Nvidia.
As such, its earnings can move markets as much as major economic or monetary policy announcements, like an interest rate decision.
Sir Keir Starmer with NVIDIA chief Huang at London Tech Week. Pic: AP
What next?
Revenue rises are forecast to continue to rise as Nvidia said it expected a rise to roughly $54bn (£40bn) in the next three months, more than the $53.14bn (£39.3bn) anticipated by analysts.
This excludes any potential shipments to China as export of Nvidia’s H20 chip, designed with the Biden administration’s export crackdown on advanced AI powering chips in mind, had been banned under US national security grounds.
But in recent weeks, Nvidia and another chipmaker, AMD, reached an unprecedented agreement to pay the Trump administration a 15% portion of China sales in return for export licences to send chips to China.
There were no H20 sales at all to China in the second quarter of the year, the period for which results were released on Wednesday evening.
Previously, 13% of Nvidia’s revenue came from China, with nearly 50% coming from the US.
Market reaction
Despite the expectation-beating results, Nvidia shares were down in after-hours trading, as the massive revenue rises previously booked by the company were not repeated in the latest quarter.
Compared to a year ago, revenues rose 56% and 6% compared to the three months up to April.
The absence of Chinese sales in forecasts appeared to disappoint.
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