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Europe rallied as UK U-turn settles nerves

Europe rallied as UK U-turn settles nerves
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  • European markets benefit as UK move supports sterling, gilts
  • Nikkei down 1.2%, S&P 500 up after edge slide
  • Dollar closes to 149 yen, wary of market intervention
  • China’s yuan fell after Xi’s congressional speech

LONDON, Oct 17 (Reuters) – European shares, bonds and major currencies rallied on Monday, helped by relief that Britain’s new finance minister scrapped virtually all of the unfunded tax cuts that roiled U.K. markets this month.

Major Asian markets struggled overnight but Europe’s STOXX 600 (.STOXX) In London, the pound and U.K. government bonds rose 0.6% and Wall Street futures rose more than 1%. /GB/XRF

Britain’s new finance minister Jeremy Hunt He declared “Almost all” tax systems are inverse It was installed just three weeks ago by Prime Minister Liz Truss and her predecessor Kwasi Kwarteng.

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Bank of England Governor Andrew Bailey gave Hunt a vote of confidence on Saturday, saying his “immediate meeting of mind“The public finances need to be fixed, with an estimated £70 billion ($78.72 billion) black hole.

Hunt said in his statement That “borrowing to pay for these tax cuts is not right” and that his measures would bring in more than £30 billion. Saxo Bank’s head of FX strategy, John Hardy, however, said matters in Britain would remain the main focus.

“It’s a bid for stability in sterling and the UK bond market that goes in the right direction,” Hardy said, pointing to a rally in the pound against both the dollar and the euro as a thumbs-up from the market for Hunt’s move. ..

“But I think we’ve probably gone as far as we can with the sterling move… We still have nothing to address the structural problems in the UK that drove the vulnerability in the first place – a huge yawning twin deficit that still needs to be financed.”

The yield on British 10-year gilts fell 34 bps to 3.97%, while the 30-year fell 38 bps to 3.78% in a reactive rally. . The yield reflects the cost of borrowing and moves inversely to the price of a bond.

Other European markets also benefited, with the German 10-year Bund yield falling to 2.245% after hitting 2.423% last week, the highest since August 2011.

That was despite two key ECB policymakers suing for trimming banks’ balance sheets over the weekend and US inflation data on Friday raising bets on another aggressive rate hike from the Federal Reserve next month.

rotation

Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan fell (.MIAPJ0000PUS) Declined 0.6% and returned to last week’s 2-1/2 year low

Japan’s Nikkei (.N225) Shade 1.2% and although Chinese blue chips (.CSI300) Uncertainty was up 0.4% as Beijing took unusual steps Release delayed of economic indicators, including third-quarter gross domestic product data due Tuesday.

The delay comes amid the ruling Communist Party’s week-long congress, a twice-a-decade event that is a particularly sensitive time in China and where President Xi Jinping is widely expected to win a record-breaking third leadership term.

S&P 500 futures were already up more than 1% amid a rally in Europe and a sharp Wall Street retreat on Friday.

While the S&P is far from its peak of 25%, BofA economist Jared Woodard warns that the slide is far from over as the world transitions from two decades of 2% inflation to a period of more like 5% inflation.

“2% of the world’s $70 trillion in ‘new’ technology, growth, and government bond asset values ​​are vulnerable to this secular shift as the boom in ‘old’ industries, such as energy and materials, reverses decades of under-investment,” he wrote.

“Rotating between 60/40 proxies and buying what’s scarce — energy, food, energy — is the best way to diversify investors.”

Interference clock

A red-hot US consumer price report and rising inflation expectations have markets fully expecting the Federal Reserve to raise rates 75 basis points next month and possibly the same again in December.

A host of Fed policymakers are speaking this week, so there will be plenty of opportunity for hawkish headlines. Earnings season also continues with Tesla (TSLA.O)Netflix (NFLX.O) and Johnson and Johnson (JNJ.N) reporting, among others.

Analysts now expect profits at S&P 500 companies to rise just 3.6% from a year ago, far below the 11.1% increase expected in early July, according to Refinitiv IBES data.

Goldman Sachs (GS.N) Also reported this week and the Wall Street Journal reports investment bank plans His biggest business restructuring.

In China, Congress is expected to grant Xi a third term, with top economic roles likely to be reshuffled as incumbents near retirement age or term-limits.

“Investors haven’t fully digested that China is no longer going to be a high-growth economy,” said Janus Henderson emerging markets portfolio manager Ales Kautny, who expects the yuan to continue falling. “It’s not going to grow 5%-6% a year, it’s going to be 2%-3%.”

In currency markets, the dollar remained king as investors priced in US rates topping around 5%.

The yen was hit particularly hard as the Bank of Japan stuck to its ultra-easy policy, while authorities refrained from intervening last week after the dollar broke through the 148.00 level to hit a 32-year high.

Early on Monday, the dollar rose to 148.76 yen and is headed for the next target of 150.00.

The euro held at $0.9733, putting up a steady performance last week, while the US dollar index shed a fraction to 113.20.

A rising dollar and global bond yields were a drag on gold, which was stuck at $1,648 an ounce.

Oil prices were trying to bounce back, after plunging more than 6% last week as fears of a demand slowdown outweighed OPEC’s plans to cut output.

Brent was up 90 cents at $92.55 a barrel, while U.S. crude rose 84 cents to $86.45 a barrel.

($1 = 0.8892 pounds)

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Reporting by Mark Jones; Additional reporting by Wayne Cole in Sydney; Editing by Susan Fenton and Alison Williams

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