Unstable cable | Financial Post

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A look at the day ahead in the US and global markets by Mike Dolan.

Britain’s bid to stimulate growth with tax cuts unfunded by rising inflation has turned into a bona fide crisis for UK government bonds and sterling, with questions for all governments seeking more and more debt-financed economic supports.

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Supercharging an already rampant US dollar around the world, the Sterling/Dollar rate, nicknamed the “cable” by traders, went into virtual freefall at one point early Monday.

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Foreign investors opted for the exits after the government’s new tax plan threatened to stretch Britain’s finances to their limits on Friday and Finance Minister Kwasi Kwarteng promised further tax cuts at the weekend.

Sterling, which has fallen almost 10% from high to low against the dollar in the space of a week, plunged almost 5% at one point on Monday to a record low against the dollar of 1 $.0327, surpassing its previous all-time low. of $1.0520 since 1985. While it recouped some of those gains when London trade opened, it remains down a further 1% since Friday and is also down nearly 1% from to the euro

The fall in the pound comes ahead of large auctions of long-term, inflation-linked British government bonds this week and increased liquidity issues in gilt markets.

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The scale of the pound’s losses and fiscal fears has many traders speculating about an emergency rate hike by the Bank of England. Rate futures are now trading up three-quarters of a point to 3% ahead of the BoE’s next meeting on November 2.

British 10-year gilt yields are above 4% for the first time in 12 years and gilts’ yield premium over German bonds is now approaching a full two percentage points for the first time in 31 years, levels that have not they had seen each other since shortly before the pound. it was kicked out of the pre-euro monetary network system, the exchange rate mechanism, in 1992.

The UK 2-year gilt yield moved above 4.5%, up 150 basis points this month and the highest since 2008, and reflecting growing recession fears, the yield curve of 2-10 year UK government bonds are the most invested since the banking crash. of 2008.

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Although relatively mild compared to sterling’s fall, the euro also fell against the dollar after Italy’s weekend general election looked set to usher in the most right-wing coalition government since Second World War.

Ten-year Italian government bond yields rose nearly 4.5% to their highest since 2013 in the wake of the eurozone sovereign debt crisis.

But the move reflected a general sell-off in bonds and, in stark contrast to UK government bonds, yield premiums on German bonds were little changed from Friday as the right-wing coalition looked well below par of a two-thirds parliamentary coalition that would allow him to change the situation. Constitution without referendum.

Pressures on the dollar increased across the board.

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After last week’s dramatic intervention to buy yen in open markets, Japan’s Finance Minister Shunichi Suzuki continued to warn that the country would act again to calm what he saw as excessive speculative movements in the currency market.

China also acted differently on Monday to stem the yuan’s slide against the dollar. The People’s Bank of China will from Wednesday increase foreign exchange risk reserves for financial institutions when they buy foreign currency through foreign exchange forwards to 20% from the current zero.

With recession looming and inflation and interest rate pressures rising, European business polls are darkening and Germany’s Ifo business survey for September came in well below the forecasts The Organization for Economic Co-operation and Development, warning of a global recession, said central banks needed to continue to fight inflation and saw US Fed rates hit 4.75% next year

As we approach the end of the third quarter, the S&P500 is in the red for three months and is set to post its third straight quarterly loss since the fallout from the 2008 collapse of Lehman Brothers.

Key developments that should give further direction to US markets later on Tuesday: * September US Dallas Fed manufacturing index; August Chicago Fed Activity Index * Atlanta Fed Chief Bostic Speaks

(By Mike Dolan Editing by William Maclean mike.dolan @reutersMikeD)