Markets are having to pay more attention to geopolitics than usual. Of course, the war between Russia and Ukraine is still making headlines but the recent political chaos in the UK and President Xi Jinping’s renewed premiership in China have demanded a lot of attention in the last few weeks.
The UK has seen three prime ministers in under two months, not a good selling point for any country. The latest change, which sees Rishi Sunak take over Liz Truss after just six weeks in office, was partly prompted by incoherent fiscal measures, including unfunded tax cuts. Liz Truss’ fiscal policies caused a dramatic spike in bond yields leading the Bank of England to intervene to maintain financial stability in the UK.
The British pound has suffered badly over the last few weeks, but the appointment of Rishi Sunak as the UK’s new prime minister seems to have provided some comfort to investors. His previous stint as chancellor and his clash with Truss regarding her plan to borrow money during an inflation crisis might have contributed to confidence with investors potentially seeing him as better suited for the job in current conditions. That said, the UK still faces many challenges, not least the battle to bring down double-digit inflation without damaging growth too much.
No doubt focus will be firmly on the Bank of England (BoE) meeting next week and how policy adapts to the recent moves in markets. Analysts are forecasting a firm hawkish stance from Andrew Bailey and his team, with as much as 100bps partially priced in, but we know from previous experiences they struggle to live up to market expectations. Nonetheless, the pound seems to have found a footing for now, with GBP/USD at a 6-week high before ‘Trussonomics’ took place.
The move higher has also been aided by the recent weakness in the US dollar, with the dollar index trading below 110, its lowest level in 5 weeks. The main reason behind this move is expectations of a less hawkish Fed in the near future. There is little doubt that the meeting next Wednesday could bring another 75bps hike, but markets are now pricing in a higher chance of a rate cut in 2023 as concerns grow over the health of the US economy.
There is also month-end rebalancing to take into account, which favors a selloff in the dollar to balance the move in equities. Still, we can expect this move to play into next week, at which point the main focus will be on the Fed and, most importantly, on Powell’s speech, which will be scrutinized for any sign of weakness.
And to round up sentiment for the week, the re-election of President Xi Jinping in China has sparked a selloff in Chinese assets as he has stacked his government with allies and tightened his grip on the country. His enforcement of zero-covid policies is likely to remain for the foreseeable future, putting China, and by extension, the rest of the world, at greater risk of a recession.
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