Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 04/10/22
Controversial fiscal policies (United Kingdom) and banking sector woes injected further volatility into global markets
Key Takeaways
The S&P500 index lost -2.9% in the past week (-25% YtD), with all sectors, excluding the Energy sub-index, ending in negative territory. The likelihood of oil production cut by the OPEC+ has increased, in order to support oil prices. Third-quarter earnings season will begin during the second half of October, with consensus expectations of +3% year-over-year EPS growth, though -3% excluding the contribution of energy companies (+115%).
The Eurostoxx index declined by -1% wow (-24% YtD), with euro area banks underperforming by a wide margin. The SX7E lost -5.5%, following press reports that Credit Suisse is looking to raise capital in order to support its plan to split the investment bank arm into three units. Banks’ valuations have fallen significantly year-to-date, with PBV ranging from 0.2x to 0.6x, while Credit Suisse’s credit default swaps widened significantly to 462 basis points, from 123 basis points on September 23rd.
The FTSE100 index decreased by -1.8% wow (-7% YtD), as the UK Government’s Growth Plan, which includes broad-based, unfunded, reductions and cancellations of planned increases in taxes and social contributions, initially triggered a sharp sell-off in Gilts and the pound. UK domestic-focused stocks underperformed, with the FTSE250 index declining by -4.5% wow (-27% YtD). Estimates from UK’s HM Treasury place the overall cost at £161bn or 6.6% of UK GDP over the next 5 years. The S&P ratings agency cut the outlook for its AA credit rating for UK sovereign debt to negative, from stable due to Government’s unfunded tax cut plans.
In order to restore orderly market functioning, the Bank of England launched an emergency intervention, announcing that will purchase long-dated UK government bonds from September 28th to October 14th, on whatever scale is necessary. Government bond interest rates retreated following the temporary BoE support, though Gilt/UST and Gilt/Bund long-term rate differentials remain wider compared with one month ago by circa 60 and 70 basis points, respectively.
The Bank of England has postponed the beginning of Gilt sale operations that were due to commence next week. The BoE holds circa £840B of domestic government bonds or 34% of UK GDP (BOJ: 97% of GDP, ECB: 33%, FED: 23%). The latest developments emphasize that the process of balance sheet unwinding could entail significant volatility regarding the transmission to medium and longer-term interest rates.
Economic data reinforced expectations for aggressive monetary tightening. Euro area inflation climbed to 10% year-over-year in September, an all-time high, from 9.1% in August. Aggressive interest rate hikes may cause some pain to the economy, as Fed Chair Powell highlighted in the latest FOMC meeting. Based on OECD’s interim projections, real GDP growth is expected to slow sharply in 2023 (US: +0.5% from +1.3% in 2022, euro area: +0.3% from +3.1%), whereas the distribution of growth risks is to the downside.
After a turbulent week, risk and safe-haven assets kicked off Monday with gains. On Monday, the UK Government made a U-turn on its plan to abolish the additional rate of income tax for the highest earners. The specific item represents only circa £3B of the Growth Plan policy decisions.
Key Takeaways
The S&P500 index lost -2.9% in the past week (-25% YtD), with all sectors, excluding the Energy sub-index, ending in negative territory. The likelihood of oil production cut by the OPEC+ has increased, in order to support oil prices. Third-quarter earnings season will begin during the second half of October, with consensus expectations of +3% year-over-year EPS growth, though -3% excluding the contribution of energy companies (+115%).
The Eurostoxx index declined by -1% wow (-24% YtD), with euro area banks underperforming by a wide margin. The SX7E lost -5.5%, following press reports that Credit Suisse is looking to raise capital in order to support its plan to split the investment bank arm into three units. Banks’ valuations have fallen significantly year-to-date, with PBV ranging from 0.2x to 0.6x, while Credit Suisse’s credit default swaps widened significantly to 462 basis points, from 123 basis points on September 23rd.
The FTSE100 index decreased by -1.8% wow (-7% YtD), as the UK Government’s Growth Plan, which includes broad-based, unfunded, reductions and cancellations of planned increases in taxes and social contributions, initially triggered a sharp sell-off in Gilts and the pound. UK domestic-focused stocks underperformed, with the FTSE250 index declining by -4.5% wow (-27% YtD). Estimates from UK’s HM Treasury place the overall cost at £161bn or 6.6% of UK GDP over the next 5 years. The S&P ratings agency cut the outlook for its AA credit rating for UK sovereign debt to negative, from stable due to Government’s unfunded tax cut plans.
In order to restore orderly market functioning, the Bank of England launched an emergency intervention, announcing that will purchase long-dated UK government bonds from September 28th to October 14th, on whatever scale is necessary. Government bond interest rates retreated following the temporary BoE support, though Gilt/UST and Gilt/Bund long-term rate differentials remain wider compared with one month ago by circa 60 and 70 basis points, respectively.
The Bank of England has postponed the beginning of Gilt sale operations that were due to commence next week. The BoE holds circa £840B of domestic government bonds or 34% of UK GDP (BOJ: 97% of GDP, ECB: 33%, FED: 23%). The latest developments emphasize that the process of balance sheet unwinding could entail significant volatility regarding the transmission to medium and longer-term interest rates.
Economic data reinforced expectations for aggressive monetary tightening. Euro area inflation climbed to 10% year-over-year in September, an all-time high, from 9.1% in August. Aggressive interest rate hikes may cause some pain to the economy, as Fed Chair Powell highlighted in the latest FOMC meeting. Based on OECD’s interim projections, real GDP growth is expected to slow sharply in 2023 (US: +0.5% from +1.3% in 2022, euro area: +0.3% from +3.1%), whereas the distribution of growth risks is to the downside.
After a turbulent week, risk and safe-haven assets kicked off Monday with gains. On Monday, the UK Government made a U-turn on its plan to abolish the additional rate of income tax for the highest earners. The specific item represents only circa £3B of the Growth Plan policy decisions.