Pound rebounds and government borrowing costs fall as Hunt fiscal statement looms

Published

2 years ago

October 17, 2022

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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

Paul Kelso

Business correspondent

@pkelso

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.

Business

Trump trade war escalation sparks global market sell-off

Published

10 hours ago

April 3, 2025

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Trump trade war escalation sparks global market sell-off

Donald Trump’s trade war escalation has sparked a global sell-off, with US stock markets seeing the biggest declines in a hit to values estimated above $2trn.

Tech and retail shares were among those worst hit when Wall Street opened for business, following on from a flight from risk across both Asia and Europe earlier in the day.

Analysis by the investment platform AJ Bell put the value of the peak losses among major indices at $2.2trn (£1.7trn).

The tech-focused Nasdaq Composite was down 5.8%, the S&P 500 by 4.3% and the Dow Jones Industrial Average by just under 4% at the height of the declines. It left all three on course for their worst one-day losses since at least September 2022 though the sell-off later eased back slightly.

Trump latest: UK considers tariff retaliation

Analysts said the focus in the US was largely on the impact that the expanded tariff regime will have on the domestic economy but also effects on global sales given widespread anger abroad among the more than 180 nations and territories hit by reciprocal tariffs on Mr Trump‘s self-styled “liberation day”.

They are set to take effect next week, with tariffs on all car, steel and aluminium imports already in effect.

Price rises are a certainty in the world’s largest economy as the president’s additional tariffs kick in, with those charges expected to be passed on down supply chains to the end user.

The White House believes its tariffs regime will force employers to build factories and hire workers in the US to escape the charges.

Economists warn the additional costs will add upward pressure to US inflation and potentially choke demand and hiring, ricking a slide towards recession.

Apple was among the biggest losers in cash terms in Thursday’s trading as its shares fell by almost 9%, leaving it on track for its worst daily performance since the start of the COVID pandemic.

Concerns among shareholders were said to include the prospects for US price hikes when its products are shipped to the US from Asia.

Other losers included Tesla, down by almost 6% and Nvidia down by more than 6%.

Many retail stocks including those for Target and Footlocker lost more than 10% of their respective market values.

The European Union is expected to retaliate in a bid to put pressure on the US to back down.

The prospect of a tit-for-tat trade war saw the CAC 40 in France and German DAX fall by more than 3.4% and 3% respectively.

The FTSE 100, which is internationally focused, was 1.6% lower by the close – a three-month low.

Financial stocks were worst hit with Asia-focused Standard Chartered bank enduring the worst fall in percentage terms of 13%, followed closely by its larger rival HSBC.

Among the stocks seeing big declines were those for big energy as oil Brent crude costs fell back by 6% to $70 due to expectations a trade war will hurt demand.

The more domestically relevant FTSE 250 was 2.2% lower.

A weakening dollar saw the pound briefly hit a six-month high against the US currency at $1.32.

There was a rush for safe haven gold earlier in the day as a new record high was struck though it was later trading down.

Sean Sun, portfolio manager at Thornburg Investment Management, said of the state of play: “Markets may actually be underreacting, especially if these rates turn out to be final, given the potential knock-on effects to global consumption and trade.”

He warned there was a big risk of escalation ahead through countermeasures against the US.

Sandra Ebner, senior economist at Union Investment, said: “We assume that the tariffs will not remain in place in the
announced range, but will instead be a starting point for further negotiations.

“Trump has set a maximum demand from which the level of tariffs should decrease”.

She added: “Since the measures would not affect all regions and sectors equally, there will be winners and losers as in 2018 – although the losers are more likely to be in the EU than in North America.

“To protect companies in Europe from the effects of tariffs, the EU should not respond with high counter-tariffs. In any case, their impact in the US is not likely to be significant. It would be more efficient to provide targeted support to EU companies in the form of investment and stimulus.”

Business

British businesses issue warning over ‘deeply troubling’ Trump tariffs

Published

10 hours ago

April 3, 2025

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British businesses issue warning over 'deeply troubling' Trump tariffs

British companies and business groups have expressed alarm over President Donald Trump’s 10% tariff on UK goods entering the US – but cautioned against retaliatory measures.

It comes as Business Secretary Jonathan Reynolds launched a consultation with firms on taxes the UK could implement in response to the new levies.

Money blog: Pension top-up deadline days away

A 400-page list of 8,000 US goods that could be targeted by UK tariffs has been published, including items like whiskey and jeans.

On so-called “Liberation Day”, Mr Trump announced UK goods entering the US will be subject to a 10% tax while cars will be slapped with a 25% levy.

The government’s handling of tariff negotiations with the US to date has been praised by representative and industry bodies as being “cool” and “calm” – and they urged ministers to continue that approach by not retaliating.

Business lobby group the CBI (Confederation of British Industry) said: “Retaliation will only add to supply chain disruption, slow down investment, and stoke volatility in prices”.

Industry body the British Retail Consortium (BRC) also cautioned: “Retaliatory tariffs should only be a last resort”.

‘Deeply troubling’

While a major category of exports, in the form of services – like finance and information technology (IT) – has been exempted from the tariffs, the impact on UK business is expected to be significant.

Mr Trump’s announcement was described as “deeply troubling for businesses” by the CBI’s chief executive Rain Newton-Smith.

The Federation of Small Businesses (FSB) also said the tariffs were “a major blow” to small and medium companies (SMEs), as 59% of small UK exporters sell to the US. It called for emergency government aid to help those affected.

“Tariffs will cause untold damage to small businesses trying to trade their way into profit while the domestic economy remains flat,” the FSB’s policy chair Tina McKenzie said. “The fallout will stifle growth” and “hurt opportunities”, she added.

Companies will need to adapt and overcome, the British Export Association said, but added: “Unfortunately adaptation will come at a cost that not all businesses will be able to bear.”

Watch dealer and component seller Darren Townend told Sky News the 10% hit would be “painful” as “people will buy less”.

“I am a fan of Trump, but this is nuts,” he said. “I expect some bad months ahead.”

Industry body Make UK said the 25% tariffs on cars, steel and aluminium would in particular be devastating for UK manufacturing.

Cars hard hit

Carmakers are among the biggest losers from the world trade order reshuffle.

Auto industry body the Society of Motor Manufacturers and Traders (SMMT) said the taxes were “deeply disappointing and potentially damaging measure”.

“These tariff costs cannot be absorbed by manufacturers”, SMMT chief executive Mike Hawes said. “UK producers may have to review output in the face of constrained demand”.

The new taxes on cars took effect on Thursday morning, while the measures impacting car parts are due to come in on 3 May.

Business

Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Published

10 hours ago

April 3, 2025

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Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Economists immediately started scratching their heads when Donald Trump raised his tariffs placard in the Rose Garden on Wednesday.

On that list he detailed the rate the US believes it is being charged by each country, along with its response: A reciprocal tariff at half that rate.

So, take China for example. Donald Trump said his team had run the numbers and the world’s second-largest economy was implementing an effective tariff of 67% on US imports. The US is responding with 34%.

Trump latest: UK considers tariff retaliation

How did he come up with that 67%? This is where things get a bit murky. The US claims it studied its trading relationship with individual countries, examining non-tariff barriers as well as tariff barriers. That includes, for example, regulations that make it difficult for US exporters.

However, the actual methodology appears to be far cruder. Instead of responding to individual countries’ trade barriers, Trump is attacking those enjoying large trade surpluses with the US.

A formula released by the US trade representative laid this bare. It took the US’s trade deficit in goods with each country and divided that by imports from that country. That figure was then divided by two.

So, in the case of China, which has a trade surplus of $295bn on total US exports of $438bn, that gives a ratio of 68%. The US divided that by two, giving a reciprocal tariff of 34%.

This is a blunt measure which targets big importers to the US, irrespective of the trade barriers they have erected. This is all part of Donald Trump’s efforts to shrink the country’s deficit – although it’s US consumers who will end up paying the price.

But what about the small number of countries where the US has a trade surplus? Shouldn’t they actually be benefiting from all of this?

That includes the UK, with whom the US has a surplus (by its own calculations) of $12bn. By its own reciprocal tariff formula, the UK should be benefitting from a “negative tariff” of 9%.

Instead, it has been hit by a 10% baseline tariff. Number 10 may be breathing a sigh of relief – the US could, after all, have gone after us for our 20% VAT rate on imports, which it takes issue with – but, by Trump’s own measure, we haven’t got off as lightly as we should have.