U.K. Markets Escape Brexit Deadline to Face New Fiscal Risks By Bloomberg



(Bloomberg) — Just as British politics looked to be quietening down for market traders, the finance minister’s surprise departure is leading to predictions of a spending bonanza.

That has investors preparing for U.K. government bonds to weaken relative to their peers, taking the shine off this year’s rally. Greater infrastructure investment aimed at boosting the economy may give the pound a temporary lift, yet longer-term sentiment is still shaky given tough talks over a trading relationship with the European Union still lie ahead.

Chancellor of the Exchequer Sajid Javid resigned Thursday after a row with Prime Minister Boris Johnson, with Rishi Sunak becoming the new chancellor. It’s no longer clear that the government will keep to fiscal rules that require its day-to-day spending and revenue to be balanced within three years.

“The market reaction of gilts selling off, a steeper rates curve and a stronger sterling clearly indicate that expectations are increasing for fiscal-stimulus announcements,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privee. “We could see a situation where U.K. gilts underperform German bunds further going into the budget.

Gilts bucked global bond gains on Thursday, sending 10-year yields to a three-week high. That narrowed their spread against U.S. Treasuries, where yields have been falling as the coronavirus sparks haven demand.

The pound rallied above $1.30 and sentiment in options markets has flipped in favor of further gains over the next month, but beyond that traders are still betting on weakness. As sterling gained, the underperformed the region Thursday, given the benchmark’s predominance of global exporters.

The new finance minister, seen as a ally of Johnson, may give markets some comfort in a more united policy platform, said Nick Burchett, fund manager at Cavendish Asset Management. Sunak’s investment banking background should also be good for the City of London, he said.

However, the main risk for the U.K. financial sector continues to be the prospect of losing access to EU markets after the 2020 Brexit transition period. The EU and U.K. have been sparring over the ability of banks to operate in the bloc’s markets even before the talks have formally begun.

“The stance on the post-Brexit trade negotiations is a bit more muddled given that Javid was a big proponent of the equivalence, which may now be off the table,” said Valentin Marinov, head of G-10 currencies research at Credit Agricole (PA:) SA. “The big risk for the sterling bulls remains disappointment from the budget and the upcoming negotiations.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





Source link

Leave a Reply

Your email address will not be published. Required fields are marked *