Pound jumps as Chancellor Hunt to announce fiscal plans – Daily Market Brief, October 17, 2022

GBP/USD has risen by almost 1% after the new UK Chancellor, Jeremy Hunt, wins the backing of the BoE Governor. The Chancellor will make a statement on measures to support fiscal sustainability today, bringing some calm to a jittery market.

·         Will the gilt market hold up without the BoE’s support?

·         China’s Communist Party Conference is in focus this week.

·         US banks earnings continue with BAC & GS to release Q3 results.

The FTSE ended a few points higher on Friday but still booked losses of 1.9% across the week. Meanwhile, the pound fell 1.4% on Friday as events came to a head. Prime Minister Liz Truss fired Chancellor Kwasi Kwarteng and backtracked further on the mini-budget. Corporation tax will now rise as previously planned. The problem is that this only removed around £18 billion from the £45 billion black hole that needs filling.

Over the weekend, newly appointed Chancellor Jeremy Hunt won the crucial backing of the BoE Governor Andrew Bailey for his plan to stabilise the UK’s public finances. The new Chancellor has effectively announced that he will ditch the Prime Minister’s strong expansionary policy, instead agreeing with Bailey over the importance of fiscal sustainability.

Jeremy Hunt will bring forward the Medium-term fiscal plan, which is expected to support fiscal sustainability to today, two weeks earlier than initially expected, in an attempt to bring a level of calm to the UK markets. The pound is pushing higher in early trade, GBP/USD has risen 0.9% to 1.1270 at the time of writing, and EUR/GBP trades -0.55% at 0.8650.

Gilt market

All eyes will be on the gilt market as it opens without the support of the BoE to shore it up. Will the gilt market give Jeremy Hunt the benefit of the doubt, or will yields keep rising? Confidence in the UK economic outlook has taken a massive hit since the announcement of the mini-budget, so it will take serious measures and time for that confidence to be repaired.

Amid these latest developments, Liz Truss’ grip on power has weakened significantly, with some of her own party calling for her resignation. There are questions about whether Truss will survive until the end of the week. More political uncertainty could limit any gains in the pound.

China’s Communist Party Conference

European markets are set for a weaker start to the day after weakness in Asia overnight. The Chinese Communist Party Conference will be in focus this week and is expected to cement the power of XI Jinping for a further five years. In a speech, XI Jinping warned of storms ahead and also stuck by China’s zero-COVID campaign and housing market policies which have weighed on the economy. The offshore yuan extended gains versus the USD. The US dollar index is edging lower after booking a second straight week of gains last week.

Banks’ earnings

US earnings will continue to come through with Bank of America and Goldman Sachs due to release of Q3 numbers today. These come after JP Morgan, Wells Fargo, and Citigroup beat forecasts on Friday. However, Morgan Stanley was disappointing.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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