Shares surged after markets were saved from implosion by the Bank of England on Wednesday in a dramatic intervention that for the moment halted the collapse of confidence in the pound and the UK economy.
Markets steadied after the Bank of England came to the aid of the ailing pound and stuttering UK financial system and said it would buy bonds to combat what it called a “material risk” to financial stability generated by the 45 billion pounds of unfunded tax cuts from the Conservative government.
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the Bank of England said in a statement detailing its intervention
“The purchases will be carried out on whatever scale is necessary to effect this outcome,” it added, saying the UK Treasury would underwrite any losses on the planned 65 billion pounds of bond buy ins over the next 13 days.
It was a stunning reversal in the monetary tightening policies implemented this year by most central banks to try and control inflation, including the Bank of England which only lifted its key rate by 0.5% to 2.25% last week.
The move steadied the British pound, which became the centre of attention in markets this week as it tumbled to a record low against the US dollar. It traded above $US1.08 in Thursday trading in Asia after falling under $US1.058 in earlier trading in Europe before the BoE intervention was revealed in an early morning statement.
The Bank of England move also helped the Aussie dollar which rose back past 65 US cents from under 64 US cents (around 63.74) while the futures market had a 98-point jump pencilled in for the start of ASX trading Thursday.
US Treasury yields retreated from their highest levels in more than a decade, easing concerns that higher rates were choking the economy with the yield on the key 10 year bond tumbling after touching 4% for the first time in years. It shed 21 points to trade around 3.78% in Asian dealings Thursday morning.
After UK and European stockmarkets steadied, Wall Street roared back.
The Dow jumped 548.75 points, or 1.88%, ending at 29,683.74. The S&P 500 rose 1.97% to 3,719.04, one day after hitting a new bear market low. The Nasdaq Composite was up 2.05%, ending the session at 11,051.64.
The Dow and the S&P 500 snapped a six-day losing streak. The Dow is now 19.7% off its 52-week high, while the S&P 500 is 22.8% below its record. The Nasdaq is down 31.8%.
The Bank of England said it would spend 5 billion pounds a day for the next 13 days buying long dated (around 10 year) UK bonds (called ‘gilts’) in an effort to stabilise the weak pound and stop the financial system from freezing all credit.
The move drives down the long dated – 10 and 20 year – bond yields (as the RBA did in Australia) and through that, interest rates across the economy, especially for home loans. It also helps support the pound.
The market yield on the 20-year UK government bond fell to 4% from just over 5% in a matter of minutes after the Bank of England’s announcement.
The bank also suspended a program to sell bonds that it had bought during its support buying in the pandemic in 20920 and 2021, a move that takes pressure off the market and allows the bond buying program to do its work and lift liquidity and lower rates. the bond sales have been put off for a month.
The central bank acted after most UK home lenders halted activities because interest rates had soared making many of the loans were in the process of finalising uneconomic.
Some stopped processing loans made in the past week or so, others changed terms on surprised customers and while some of the largest just stopped lending, a move the Bank of England was concerned would spread to other lending and effectively freeze all credit across the economy.
That in turn could have brough retailing to a halt, forced companies to shut their doors, leaving staff unpaid or sent thousands of people onto unemployment benefits within days.
But the Truss government says it won’t change its policy for the unfunded tax cuts (because Prime Minister Truss made it her only policy in campaigning among Conservative Party members for the leadership and to become PM).
That means the crisis has been postponed, unless Truss and her cabinet can produce a convincing set of spending cuts to pay for the tax changes. At a time when millions of Britons are facing a terrible, energy short winter and being paid huge subsidies to survive, cutting spending doesn’t look at option.
