New UK finance minister Hunt ditches most of ‘mini-budget’, pound and gilts soar

Britain’s new finance minister on Monday jettisoned most of Prime Minister Liz Truss’ raft of fiscal measures, saying it was “not right” to borrow money to fund tax cuts, sending long-dated gilt prices sharply higher.

The pound soared by as much as 1.4% to a session high of $1.1332 and by 0.8% against the euro to a peak of 86.90 pence.

Jeremy Hunt on Friday replaced Kwasi Kwarteng, who Prime Minister Liz Truss sacked following the so-called “mini-budget” on Sept. 23 that sent UK assets sliding.

A raft of unfunded tax cuts at a time when the government is already dealing with a substantial current account deficit, a weak currency, high inflation and an economy edging into recession, unnerved investors and forced the Bank of England to step in to stabilise bond markets.

With the UK bond market in meltdown, the Truss government had already ditched two central elements of its fiscal package, including a plan to freeze corporation tax and another to remove a higher tax rate for the top earners.

Hunt on Monday announced a series of tax changes that he said would raise 32 billion pounds ($36.19 billion) a year in extra revenues.

MARKET REACTION

BONDS: Yields on the 30-year gilt dropped by nearly 40 basis points to 4.387%, marking one of its biggest daily drops on record.

STERLING: The pound rose against the dollar and the euro, gaining 1.1% and 0.7%, respectively.

STOCKS: Blue-chip stocks in London bounced 0.7%, extending gains, while mid-cap stocks, which are more sensitive to the UK economy, rose 1.3% on the day

COMMENTS:

DANNI HEWSON, FINANCIAL ANALYIST, AJ BELL, LONDON:

“Markets seem prepared to give Jeremy Hunt the chance to turn back the clock. Sterling is up, gilt yields have fallen sharply, and London’s indices are on the front foot. The new Chancellor has bought the government some breathing space and this morning’s market reaction will have sent a clear message to both the PM and her detractors that “Trussonomics” should never have been seriously considered, at least not whilst the economy is taking such a beating.

But markets are fickle, and two weeks is a long time in economics as in politics. It’s a pretty easy and obvious step to reverse most of those unfunded tax cuts announced in the “mini-budget” but it’s less straight forward to move the debate along. And that’s where the real risk lies, austerity might not be palatable, but it seems to be on the table, Mr. Hunt now needs to find a way to make that policy palatable to a country already feeling queasy from their own budgetary issues.”

PAUL BARNES, CHIEF EXECUTIVE, ASSOCIATION OF RETAIL:

“The decision to reverse plans to reintroduce VAT free shopping for international visitors will come as a hammer blow to UK tourism and the British high street.

This short-sighted move is based on inaccurate and incomplete projections, and risks putting a brake on the return of international visitors who are vital drivers of economic growth throughout the UK.

We urge the Chancellor to pause, reflect and commit to a full cost-benefit assessment before deciding on the future of tax-free shopping, which we know is a key motivator for international tourists when choosing where to visit.”

MICHAEL HEWSON, CHIEF MARKETS STRATEGIST, CMC MARKETS, LONDON:

“What Jeremy Hunt has done is basically put the UK ‘back into the pack’ of Europe, the U.S. and pretty much everyone else. So the UK is not the outlier when it comes to its monetary policy and its fiscal policy. That doesn’t change the outlook for the broader global economy and that will have an effect on borrowing costs going forward. It basically shifts the focus, perhaps now, on how long Liz Truss can survive.”

KIER BOLEY, CO-HEAD AND CIO OF ALTERNATIVE INVESTMENT SOLUTIONS, UBP, LONDON:

“Looking at UK asset price moves then many managers would have cut bearish risk/taken profits before the weekend as there was clearly going to be some policy action from UK government. Given the oversold nature of Gilts and Sterling some of the short term tactical managers may have taken some long risk exposure, but with tight stops.”

JAMES ATHEY, INVESTMENT DIRECTOR, ABRDN, LONDON:

“Hunt has trod the narrow gap between political imperative and economic imperative, and he’s done so well at this stage. We’d obviously already had a decent (market) reaction at the open, and the fact that we’ve continued to see gilt (yields) fall makes sense. But we don’t think this really takes UK plc completely out of the woods. You’re still talking about an almost inevitable recession which will be accompanied by high inflation. That looks stagflationary, which is a very uncomfortable place to be, so the Bank of England has a lot of work to do.

“Sterling still faces significant challenges. All of this uncertainty and volatility just chips away at any investors’ desire to engage with the UK, so that downward pressure that comes with the current account deficit continues.”

SIMON HARVEY, HEAD (LON:HEAD) OF FX ANALYSIS, MONEX EUROPE:

“On the whole, market is reacting fairly positively. The bond market is welcoming the news that the government is limiting its largest liability, the energy price guarantee, while also reversing policies that would only add to the consumer-driven inflation backdrop. Expectations of BoE rate hikes are being cut rapidly.”

“The inflation risk remains, it has just migrated for the BoE, so the terminal rate remains high and arguably the growth risk is more substantial with the consumer less protected.”

MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON:

“Markets have reacted positively to this morning’s announcements from Chancellor Jeremy Hunt, who has torn up almost everything that was left of Kwasi Kwarteng’s ‘mini-budget’. The measures plug around 32 billion pounds of the 40 billion pound hole that still existed in the public finances after Friday’s U-turn on corporation tax being increased, and have gone some way to reassuring markets that the UK will return to a more sustainable path of borrowing.

“Increased co-ordination between the Treasury and the Bank of England also seems to be soothing some market nerves.

“Sterling has managed to reclaim the $1.13 handle. Sterling, however, is unlikely to be out of the woods just yet; while economically necessary, the latest series of U-turns simply represent another nail in the coffin of Truss’ premiership.”

PETER MCCALLUM, RATES STRATEGIST, MIZUHO, LONDON:

“Quite a big scale of back-tracking… probably not too much different from what was expected given the position that Hunt found himself in, wanting to restore credibility. Those were the comments from over the weekend. The market came into today expecting much of that. It’s quite nice to have that sooner rather than later.

“It’s all back to where we were before Kwarteng and before the mini budget but still uncertain in terms of where we go forward, how long Truss remains in place and what he (Hunt) will unveil when we get the actual budget on the 31st.

“We’re in a position where a couple of (the measures) remain but only because they’re advanced in the process and Labour supporting them.”

STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON:

“I think it would be a brave person to be buying sterling quite yet. The new Chancellor has basically reversed most of the mini-budget, but it still leaves an awful lot of borrowing and that huge fiscal gap has to be closed at some point.

“My worry now is that he has primed the markets into expecting the forthcoming OBR review to deliver some kind of clear strategy for bringing borrowing back under control and sustainably shrinking as a percentage of GDP going forward. But right now, I cannot see the current government possessing enough political capital to bring in the spending cuts etc that this requires, and with the UK’s economic reputation somewhat shredded at the moment, he could simply end up disappointing the market and see sterling sold again.”

($1 = 0.8842 pounds)