2022-09-26
Causes of stock price falls
Wrap
Risk assets continue to struggle. The only equity markets which are up on the year are Turkey and Cyprus. The latter is a minnow, the former is up only because the denominator, the Turkish Lira, has been so weak. Sterling assets continue to sink, with gilt yields (10Y) up 42bp on the day, after heavy falls last week. Gilt yields are up 109bp on the week. There is speculation that the Bank of England will come out with an emergency rate hike. The UK is truly in a mess, with fiscal and monetary policy pulling in opposite directions. Ultimately, there is only one way this will go, and that is loss of independence of the Bank.
Japanese yields are fixed, and the BoJ has been intervening to stabilize the yen. JGBs, of course, haven’t moved, but at some point they will, and the move will be explosive.
Commodities were weak, but that’s a given these days.
UK
The new budget is radical in the extreme. Who would have thought that a bunch of ministers who didn’t say a word against Rishi would have so comprehensively trashed his legacy within days of taking the reins of power.
Truss is indeed a human hand grenade, in the words of Boris Johnson. The idea that she is preserving his legacy is now laughable. I rather admire her for the effort, but if the tide doesn’t turn in her favour pretty soon, she’ll be sunk.
I keep thinking about “The Triumph of Politics” by David Stockbridge. In it he describes his despair as he gradually realizes that Reagan’s tax cutting is never going to be matched by axing of wasteful spending, as was originally planned. Truss seems to have learned that lesson, and isn’t even going through the motions of trying to make savings.
I’d like to see the a full cycle of Trussonomics, to see exactly what happens, but I fear that the lack of reserves, and external debt of well over GBP 7 tn, which is about three times GDP is going to cut it short. Macro Alf speaks.
The UK holds less than $100 bn in net FX reserves.
— Alf (@MacroAlf) September 26, 2022
That's roughly 3% of GDP.
For comparison:
- Japan: ~20% of GDP
- Switzerland: ~115% of GDP
Good luck ''defending'' the Sterling.
Image
https://www.reddit.com/r/ImagesAlbum/comments/xojq9q/face_behind_the_mask/?utm_source=share&utm_medium=web2x&context=3
This
BoE will be hoping situation calms down by itself. If it doesn't, emergency rate hike becomes a distinct possibility. Would have to be a big move. 50bps is pissing in the wind at this point. But imagine they do a large hike & it doesn't help… nasty situation to be in
— Dario Perkins (@darioperkins) September 26, 2022
Thoughts
The Fed has a balance sheet of about $10e12. A 300bp rise in rates is going to cost it ~3e-2 * $10e12, i.e. $30e10 or $300e9, or approx 1.5% of GDP. $300 bn is a big number for the Fed to come up with. It’s hard to see it not pivoting soon.
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