British Pound Nosedived to 37-Year Low on Proposed Tax Cuts

Global risk assets extended their selloff this European afternoon as fears of rapidly escalating inflation, geopolitical risks and global recession continued to weigh. An index of MSCI global stocks traded near the lowest since 2020, while S&P 500 futures fell 0.8% at the time of writing on concern that Federal Reserve rate hikes to combat persistently elevated inflation will hurt the economy. The British pound is in focus today, as the currency has dropped precipitously as U.K. tax cuts fueled concerns about higher inflation. Today’s U.S. macro data include Chicago Fed National Activity index and Dallas Fed Manufacturing Outlook.

The moves follow losses last week on rising worries central banks would keep tightening monetary policy to combat inflation. On Friday, the Dow narrowly avoided closing in a bear market. The Dow finished 1.6% lower, the S&P 500 lost 2.5%, and the Nasdaq dropped 2.6%. For the week, the Dow lost 4%, the S&P 500 fell 4.7%, and the Nasdaq was down over 5%.

Commoditywise, oil prices are easing again after plunging last week as the U.S. dollar hit its strongest level in more than two decades on fears rising interest rates could tip major economies into recession, cutting demand for oil. The WTI light sweet crude is now just about $79 per barrel.

Across Fx news, the EURUSD slid to its weakest level since 2002 as the downturn in business activity across the eurozone worsened in September with the S&P Global Composite PMI to 48.2 from 48.9 in August, the third month below the 50 level. A number below 50 signifies contraction in the economy. The GBPUSD dropped over 3.5% to below $1.09, representing a 37-year low following on from the “mini-budget” from new Chancellor of the Exchequer Kwasi Kwarteng featuring a range of tax cuts and other measures that is estimated will cost the government at least £45 billion. It led to a plunge in UK gilts causing traders to bet that the Bank of England will increase its benchmark lending rate by 100 bps in November in an attempt to reduce inflation and shore up Sterling. The plunge in UK gilts sent 10-year yields above 4% for the first time since 2010.

Meanwhile, European markets are zigzagging today, with the Europe Stoxx 600 down about 0.4% as of 3:00 p.m. CET. The British FTSE 100 fell 0.88% while the French CAC 40 Index eased by 0.11%, and the German DAX remained nearly unchanged. The Germany’s Ifo Business Climate indicator fell to 84.3 in September 2022, down from a consensus estimate of 87.0, while Spanish producer price inflation accelerated to a whopping 41.8% in August against a revised 40.5% in July.

In Asia, Japan’s Nikkei Index fell 2.66% as traders returned from a long holiday weekend. In China, the Shanghai Composite fell 1.2%. The Hang Seng fell 0.44%.

Australia’s S&P/ASX 200 fell 1.6%, while India’s S&P BSE Sensex fell 1.1%. Hong Kong’s trade deficit shrank to HKD 13.3 billion in August from HKD 26.3 billion in the year-ago month. The Bank of Japan’s services PMI rose to a 3-month high of 51.9 in September from a final reading of 49.5 a month ago, while manufacturing PMI dropped to 51.0 in September from a final 51.5.