U.K. chancellor throws out almost all major tax cuts from the mini-budget and pares back energy support
Anviksha Patel - MARKETWATCH - YESTERDAY
The U.K.’s new Chancellor of the Exchequer Jeremy Hunt has scrapped the majority of the £45 billion previously announced unfunded tax cuts in an emergency statement on the mini-budget.
Related video: Chancellor Hunt slashes energy price guarantee, scraps mini budget tax rate cut Duration 6:03 View on Watch
Hunt pulled back the government’s energy price guarantee, which was due to support households and businesses for two years. It will now remain universal until April next year, so that it will cost taxpayers “significantly less than planned.”
He said that a Treasury-led review will be created to look into how people can be supported from April onwards.
“There will be more difficult decisions I’m afraid on both tax and spending, as we deliver our commitment to get debt falling as a share of the economy over the medium term,” Hunt said.
Together, the moves save some £30 billion, ahead of the official budget plan due at the end of October.
Bond yields on the 30-year gilt — which the Bank of England was buying last week — as well as the 10-year fell sharply on Monday, by nearly 50 basis points, while the British pound rose. Sterling was up 1% to $1.1361 during Monday trading.
The government had already backtracked on a plan to cut the personal tax rate of those making more than £150,000, as well as corporate taxes.
Now the chancellor also threw out plans to cut the basic rate of income tax to 19% from 20%, as well as dividend tax cuts and a freeze on alcohol taxes.
See also: Who is Jeremy Hunt? Meet the new U.K. chancellor
The tax proposals that will remain are the cuts to stamp duty on property purchases and cuts to national insurance contributions, the latter which had already been enacted into law.
As soon as he came into the post over the weekend after Kwasi Kwarteng was fired on Friday, Hunt said he would not wait until Oct. 31 to make its medium-term fiscal statement in an effort to cool down the markets.
“No government can control markets by every government can give certainty about the sustainability of public finances. And that is one of the many factors that influence how markets behave,” Hunt stated.
The Bank of England on Monday said its temporary bond purchase program ended and “as intended, these operations have enabled a significant increase in the resilience of the sector.”
Read: Why Kwasi Kwarteng could not survive the battle with the Bank of England
Anviksha Patel - MARKETWATCH - YESTERDAY
The U.K.’s new Chancellor of the Exchequer Jeremy Hunt has scrapped the majority of the £45 billion previously announced unfunded tax cuts in an emergency statement on the mini-budget.
Related video: Chancellor Hunt slashes energy price guarantee, scraps mini budget tax rate cut Duration 6:03 View on Watch
Hunt pulled back the government’s energy price guarantee, which was due to support households and businesses for two years. It will now remain universal until April next year, so that it will cost taxpayers “significantly less than planned.”
He said that a Treasury-led review will be created to look into how people can be supported from April onwards.
“There will be more difficult decisions I’m afraid on both tax and spending, as we deliver our commitment to get debt falling as a share of the economy over the medium term,” Hunt said.
Together, the moves save some £30 billion, ahead of the official budget plan due at the end of October.
Bond yields on the 30-year gilt — which the Bank of England was buying last week — as well as the 10-year fell sharply on Monday, by nearly 50 basis points, while the British pound rose. Sterling was up 1% to $1.1361 during Monday trading.
The government had already backtracked on a plan to cut the personal tax rate of those making more than £150,000, as well as corporate taxes.
Now the chancellor also threw out plans to cut the basic rate of income tax to 19% from 20%, as well as dividend tax cuts and a freeze on alcohol taxes.
See also: Who is Jeremy Hunt? Meet the new U.K. chancellor
The tax proposals that will remain are the cuts to stamp duty on property purchases and cuts to national insurance contributions, the latter which had already been enacted into law.
As soon as he came into the post over the weekend after Kwasi Kwarteng was fired on Friday, Hunt said he would not wait until Oct. 31 to make its medium-term fiscal statement in an effort to cool down the markets.
“No government can control markets by every government can give certainty about the sustainability of public finances. And that is one of the many factors that influence how markets behave,” Hunt stated.
The Bank of England on Monday said its temporary bond purchase program ended and “as intended, these operations have enabled a significant increase in the resilience of the sector.”
Read: Why Kwasi Kwarteng could not survive the battle with the Bank of England
Market reaction
Market commentators have welcomed the early announcement and the bank intervention.
Ganesh Viswanath-Natraj, assistant professor of finance at Warwick Business School, said the policies can help “maintain the pound’s value as it makes sterling assets more attractive.”
“This signals to financial markets that government debt is on a sustainable path, leading to a more stable demand for gilts by investors,” he said.
Pantheon Macroeconomics chief U.K. economist Samuel Tombs said the announcement amounts to £31 billion of savings found, with “a further £40 billion or so to go.”
“For context, Mr. Hunt will have to reduce the average annual growth rate of total managed expenditure, excluding debt interest payments, over the years to 2025/26 to 1.8%, from the 2.7% rate in the mini-budget, if all of the remaining £40B savings are to be found from spending,” Tombs added.
Nick Macpherson, a former Treasury official, said on Twitter that the early statement was a good move to help the markets.
“There is no doubt this means market turmoil should lessen,” added Neil Birrell, chief investment officer at Premier Miton Investors, adding that domestic equities should benefit from the U-turn as well.
“However, political uncertainty has not gone away, but has probably increased. Furthermore, for investors outside the UK looking to commit money here, this see-sawing can’t help our case,” he added.
The U.K. FTSE 100 rose 1.36% on Monday.U-turn on Trussonomics
The flipflopping from Liz Truss’s administration has angered political opposition, but more importantly, Truss’s own Conservative party members, triggering a wave of bets on who could replace Truss.
Reports from The Times note that Tory MPs in the 1922 committee -– which oversees how Conservative party leaders are chosen –- held talks on Friday night to discuss Truss’s future as prime minister.
The opposition Labour could win in a landslide in the next election, according to polling by Opinium.
Market commentators have welcomed the early announcement and the bank intervention.
Ganesh Viswanath-Natraj, assistant professor of finance at Warwick Business School, said the policies can help “maintain the pound’s value as it makes sterling assets more attractive.”
“This signals to financial markets that government debt is on a sustainable path, leading to a more stable demand for gilts by investors,” he said.
Pantheon Macroeconomics chief U.K. economist Samuel Tombs said the announcement amounts to £31 billion of savings found, with “a further £40 billion or so to go.”
“For context, Mr. Hunt will have to reduce the average annual growth rate of total managed expenditure, excluding debt interest payments, over the years to 2025/26 to 1.8%, from the 2.7% rate in the mini-budget, if all of the remaining £40B savings are to be found from spending,” Tombs added.
Nick Macpherson, a former Treasury official, said on Twitter that the early statement was a good move to help the markets.
“There is no doubt this means market turmoil should lessen,” added Neil Birrell, chief investment officer at Premier Miton Investors, adding that domestic equities should benefit from the U-turn as well.
“However, political uncertainty has not gone away, but has probably increased. Furthermore, for investors outside the UK looking to commit money here, this see-sawing can’t help our case,” he added.
The U.K. FTSE 100 rose 1.36% on Monday.U-turn on Trussonomics
The flipflopping from Liz Truss’s administration has angered political opposition, but more importantly, Truss’s own Conservative party members, triggering a wave of bets on who could replace Truss.
Reports from The Times note that Tory MPs in the 1922 committee -– which oversees how Conservative party leaders are chosen –- held talks on Friday night to discuss Truss’s future as prime minister.
The opposition Labour could win in a landslide in the next election, according to polling by Opinium.
BOE to Delay Bond Sales Again After Gilt Strain, FT Says
Ruth Carson and David Goodman
Tue, October 18, 2022
(Bloomberg) -- The Bank of England is likely to delay its planned sale of government bonds after the government’s botched fiscal plan roiled financial markets, the Financial Times reported, without saying where it got the information.
The central bank had scheduled to start the sales on Oct. 31 under a so-called quantitative tightening program, weeks later than it originally planned. Policymakers led by Governor Andrew Bailey always said they would be willing to change tack in times of market stress.
A BOE spokesman declined to comment on the report.
Officials regard the gilts market as having been “very distressed” in recent weeks, a view backed by the BOE’s Financial Policy Committee, the FT said. The pound jumped as much as 0.5% to $1.1410 after the report, before erasing gains.
A delay in quantitative tightening, along with the UK government’s reversal on its fiscal policies, may offer a reprieve for pension funds that had been trying to manage their exposure to a gilt selloff. Short sellers have said they’re reducing their positions.
“The BOE backtracking on QT is a welcome relief, but the issues are deeper,” said Patrick Bennett, strategist at Canadian Imperial Bank of Commerce. “Despite any changes taking place on the ground, there is a loss of external confidence in gilts and GBP that will not be easily recovered.”
Pushing Back
The Bank of England has almost £840 billion ($956 billion) of gilt holdings, which grew during the quantitative easing it deployed for more than a decade to stimulate the economy through the global financial crisis and pandemic.
The central bank had said it intended to complete around 80 billion pounds of active sales in the next year. While that’s not vast in issuance terms, analysts had been worried about the signal it would give to markets already struggling with a lack of investor confidence and a deterioration in liquidity.
Another postponement would be the latest sign the central bank is concerned by the state of bond market in the wake of a run on UK gilts following Prime Minister Liz Truss’s ill-fated fiscal plan.
Truss’s new Chancellor of the Exchequer Jeremy Hunt on Monday reversed more of the measures his predecessor set out in September, and Oct. 31 is the date he’s due to set out his complete package.
Truss Sees UK Vision Dismantled as Rivals Fight for Her Job
The BOE on Friday finished its emergency bond-buying plan on schedule. That program was aimed at injecting liquidity into markets to help prevent a fire sale of the gilts used in some pension funds. The bonds soared Monday after a statement from Hunt.
The BOE has already conducted so-called “passive” quantitative tightening, whereby maturing bonds are allowed to roll off the balance sheet, but the process is a slow and uneven one given the distribution of maturities compared to other central banks such as the Federal Reserve.
Hedge Fund Titan Warns UK Pension Crisis Is Just the StartRuth Carson and David Goodman
Tue, October 18, 2022
(Bloomberg) -- The Bank of England is likely to delay its planned sale of government bonds after the government’s botched fiscal plan roiled financial markets, the Financial Times reported, without saying where it got the information.
The central bank had scheduled to start the sales on Oct. 31 under a so-called quantitative tightening program, weeks later than it originally planned. Policymakers led by Governor Andrew Bailey always said they would be willing to change tack in times of market stress.
A BOE spokesman declined to comment on the report.
Officials regard the gilts market as having been “very distressed” in recent weeks, a view backed by the BOE’s Financial Policy Committee, the FT said. The pound jumped as much as 0.5% to $1.1410 after the report, before erasing gains.
A delay in quantitative tightening, along with the UK government’s reversal on its fiscal policies, may offer a reprieve for pension funds that had been trying to manage their exposure to a gilt selloff. Short sellers have said they’re reducing their positions.
“The BOE backtracking on QT is a welcome relief, but the issues are deeper,” said Patrick Bennett, strategist at Canadian Imperial Bank of Commerce. “Despite any changes taking place on the ground, there is a loss of external confidence in gilts and GBP that will not be easily recovered.”
Pushing Back
The Bank of England has almost £840 billion ($956 billion) of gilt holdings, which grew during the quantitative easing it deployed for more than a decade to stimulate the economy through the global financial crisis and pandemic.
The central bank had said it intended to complete around 80 billion pounds of active sales in the next year. While that’s not vast in issuance terms, analysts had been worried about the signal it would give to markets already struggling with a lack of investor confidence and a deterioration in liquidity.
Another postponement would be the latest sign the central bank is concerned by the state of bond market in the wake of a run on UK gilts following Prime Minister Liz Truss’s ill-fated fiscal plan.
Truss’s new Chancellor of the Exchequer Jeremy Hunt on Monday reversed more of the measures his predecessor set out in September, and Oct. 31 is the date he’s due to set out his complete package.
Truss Sees UK Vision Dismantled as Rivals Fight for Her Job
The BOE on Friday finished its emergency bond-buying plan on schedule. That program was aimed at injecting liquidity into markets to help prevent a fire sale of the gilts used in some pension funds. The bonds soared Monday after a statement from Hunt.
The BOE has already conducted so-called “passive” quantitative tightening, whereby maturing bonds are allowed to roll off the balance sheet, but the process is a slow and uneven one given the distribution of maturities compared to other central banks such as the Federal Reserve.
UK gilts, pound and stocks rally on expected U-turn on fiscal plans
Reuters
Publishing date: Oct 17, 2022 •
LONDON — Long-dated British government bonds, the pound and shares all rallied on Monday ahead of a statement from new finance minister Jeremy Hunt who is expected to reverse swathes of Prime Minister Liz Truss’s economic growth plan which triggered a market rout.
Yields on 20- and 30-year gilts slid by around 34 basis points in early trade, reversing most of their sharp rises seen on Friday when a statement by Truss failed to reassure investors about the government’s fiscal plans.
The pound, which had also fallen on Friday, rose 0.7% against the dollar to $1.1258 and gained on the euro , while Britain’s domestically-focused FTSE250 outperformed European peers and gained 0.63%.
Hunt will announce tax and spending measures on Monday, two weeks earlier than scheduled, to stem a collapse in investor confidence that began when Truss’s government unveiled a push for economic growth based on unfunded tax cuts last month.
“The message is that they’re clearly trying to repair some fiscal stability,” said Kenneth Broux, senior currency strategist at Societe Generale.
“From a market perspective that makes complete sense, hence why we’re seeing yields collapse and why sterling is bid.”
“Obviously, they have to reverse everything that happened in the last three weeks, and the question is how long that takes, and whether that requires the removal of the Prime Minister.”
MARKET VOLATILITY
While in historic terms a 34 basis-point fall in yields would represent a huge rally for gilts, on Monday it only put them back to a levels seen last week – a reflection of the enormous market volatility recently.
Gilt yields remain well above the levels seen before former finance minister Kwasi Kwarteng announced Truss’s growth agenda on Sept. 23 – a measure of the deficit in investor confidence that Hunt must now address.
The 20-year gilt yield was about 71 basis points higher on Monday than its closing level on Sept. 22, the day before the announcement of the “Growth Plan,” leaving it closer to its recent peak than its pre-plan level.
“It would take an almighty fiscal tightening package to convince the market that a) the fiscal path is now sustainable and b) that Bank of England hiking risk is reduced,” said Antoine Bouvet, rates strategist at ING.
Rate futures priced in a roughly 80% chance that the BoE will raise interest rates by 100 bps to 3.25% on Nov. 3, having priced in a smaller increase to 3.0% at the end of last week.
BoE Governor Andrew Bailey said on Saturday: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
While the pound was roughly back to where it was before Kwarteng’s mini budget, it remains highly volatile with moves in sterling and British yields driving moves in other currencies and government bond markets around the world.
Speculators increased their exposure to the pound by a fifth in the latest week – the most in two months, according to data from the Commodity Futures Trading Commission.
Investors such as hedge funds added to their bullish bets on sterling for the first time since late September.
Reuters
Publishing date: Oct 17, 2022 •
LONDON — Long-dated British government bonds, the pound and shares all rallied on Monday ahead of a statement from new finance minister Jeremy Hunt who is expected to reverse swathes of Prime Minister Liz Truss’s economic growth plan which triggered a market rout.
Yields on 20- and 30-year gilts slid by around 34 basis points in early trade, reversing most of their sharp rises seen on Friday when a statement by Truss failed to reassure investors about the government’s fiscal plans.
The pound, which had also fallen on Friday, rose 0.7% against the dollar to $1.1258 and gained on the euro , while Britain’s domestically-focused FTSE250 outperformed European peers and gained 0.63%.
Hunt will announce tax and spending measures on Monday, two weeks earlier than scheduled, to stem a collapse in investor confidence that began when Truss’s government unveiled a push for economic growth based on unfunded tax cuts last month.
“The message is that they’re clearly trying to repair some fiscal stability,” said Kenneth Broux, senior currency strategist at Societe Generale.
“From a market perspective that makes complete sense, hence why we’re seeing yields collapse and why sterling is bid.”
“Obviously, they have to reverse everything that happened in the last three weeks, and the question is how long that takes, and whether that requires the removal of the Prime Minister.”
MARKET VOLATILITY
While in historic terms a 34 basis-point fall in yields would represent a huge rally for gilts, on Monday it only put them back to a levels seen last week – a reflection of the enormous market volatility recently.
Gilt yields remain well above the levels seen before former finance minister Kwasi Kwarteng announced Truss’s growth agenda on Sept. 23 – a measure of the deficit in investor confidence that Hunt must now address.
The 20-year gilt yield was about 71 basis points higher on Monday than its closing level on Sept. 22, the day before the announcement of the “Growth Plan,” leaving it closer to its recent peak than its pre-plan level.
“It would take an almighty fiscal tightening package to convince the market that a) the fiscal path is now sustainable and b) that Bank of England hiking risk is reduced,” said Antoine Bouvet, rates strategist at ING.
Rate futures priced in a roughly 80% chance that the BoE will raise interest rates by 100 bps to 3.25% on Nov. 3, having priced in a smaller increase to 3.0% at the end of last week.
BoE Governor Andrew Bailey said on Saturday: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
While the pound was roughly back to where it was before Kwarteng’s mini budget, it remains highly volatile with moves in sterling and British yields driving moves in other currencies and government bond markets around the world.
Speculators increased their exposure to the pound by a fifth in the latest week – the most in two months, according to data from the Commodity Futures Trading Commission.
Investors such as hedge funds added to their bullish bets on sterling for the first time since late September.
(Reporting by Andy Bruce and Alun John, Editing by William Schomberg and Ed Osmond)
Nishant Kumar
Mon, October 17, 2022
(Bloomberg) -- For one of the world’s largest hedge funds, the UK pension fund crisis is just starting as central banks around the world raise interest rates and turn off quantitative easing.
Paul Marshall, co-founder of $62 billion investment firm Marshall Wace, said central banks had created the perfect environment for “mal-investment’ by artificially holding interest rates low for years.
“The UK LDI industry is the first casualty of the end of the ‘money for nothing’ era -- the first dead fish to float to the surface as rising central bank interest rates act like dynamite fishing in global asset markets,” Marshall said in a letter sent to clients this month.
So-called liability-driven investments are a form of financial engineering that involve derivatives and allow defined benefit pension schemes to jack up leverage and juice returns. The Bank of England was forced to step in to stabilize markets after rising gilt yields triggered margin calls at the funds that came too quickly for them to manage.
JPMorgan Chase & Co. estimates the losses from so-called liability-driven investments deployed by pension schemes has grown to as much as £150 billion ($171 billion) since early August.
The pensions were acting like hedge fund managers with much less knowledge or nimbleness, Marshall said in the letter.
Crispin Odey, the British hedge fund manager who has profited this year from short wagers on gilts, warned the LDI crisis is only just beginning.
“LDI investors are forced to sell to pay for their losses and it does not look like it will stop,” Odey wrote in a letter sent to investors this month.
Representatives for Marshall and Odey declined to comment.
“Everyone wanted to blame the new Chancellor, Kwasi Kwarteng, for the melt down,” Odey said, referring to the former UK chancellor who stepped down from the role last week. “But I believe it was really 20 years in the creation and brought about by the unstoppable rise in prices,” Odey said.
Marshall said people won’t all agree on who should take the blame for the crisis.
“We can argue how much of the collapse in the UK gilt market was due to the timidity of the Bank of England on interest rates, how much due to Kwasi Kwarteng’s budget and how much due to the distress in the LDI industry,” he wrote.
Central banks reversing years of quantitative easing to contain spiraling inflation have induced volatility and roiled stock, bonds and currency markets. The UK government under a new chancellor has now reversed tax cuts it announced last month that sparked a sell-off in gilts and exposed the weakness in the LDI structures.
Next in line could be the European sovereign bond markets, Marshall said. The billionaire also flagged the risk of central banks pausing their tightening process given the fragility of the financial system.
“The painful path will bring casualties and it will be interesting to see how central banks react when these casualties float to the surface,” Marshall wrote. “Time will tell. But for the moment, we believe the best opportunities remain in the short side,” he said referring to a strategy that makes money from falling prices.
Marshall Wace’s flagship Eureka hedge fund is up 4.2% this year. Odey Asset Management’s Odey European Inc. hedge fund has returned a record 193% through September this year.
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