Bank of England steps in to save gilt markets

The Bank of England stepped into buy gilts—UK government bonds—to stop the disorderly rout caused by the government’s tax cut announcements at the end of last week. The BoE said that it would buy long-dated gilts and will be “carried out on whatever scale is necessary” to restore “orderly market conditions.” The bond buying will last until October 14 but the planned sale of gilts will still go on, with a first sale taking place at the end of October. Gilts soared in response, particularly on the longer end of the curve with the 30yr yield down as much as 75bps a few hours after the statement.

Consumer confidence in Germany continues to deteriorate, according to an index published by GfK. The overall index fell to -42.5 for the look ahead to October, down from -36.8 recorded for September. The print was worse than market expectations and figures for September also showed a weakening in business and income expectations. The weakness in consumer sentiment is hardly surprising for Germany given that the economy is slowing substantially—the composite PMI has been stuck below 50 for the last three months—and prices remain high as the country contends with a drop in energy supplies. A recession looks a foregone conclusion now with the OECD estimating that Germany’s economy will contract next year.

The UAE and Oman plan to link rail networks upon their completion, connecting Oman’s port of Sohar to UAE infrastructure. The announcements comes on the back of the visit of UAE president, Mohamed bin Zayed al Nahyan, to Oman, during which ADQ and the Oman Investment Authority targeted AED 30bn worth of investments in the country in sectors such as renewables, metal and infrastructure.

The UAE has also begun talks on a comprehensive economic partnership agreement with Georgia. Current trade between the two countries was USD 166m as of H1 2022. The UAE has enhanced its trading relationships with several countries this year, including Indonesia and India.

Lebanon will devalue its currency, setting the new Lebanese pound exchange rate at 15,000 per dollar rather than USDLPB 1,507.50 where it had been since 1997. The country has endured several years of economic and financial crisis, capped by a default in March 2020. The currency already trades at a much weaker level in unofficial markets. The IMF is trying to work with the government to allow USD 3bn of funding though the list of reforms required will challenge the political establishment in the country.

Today’s Economic Data and Events

• 16:00 GE CPI y/y September: forecast 9.5%
• 16:30 US initial jobless claims Sep 24: forecast 215k
• 16:30 US GDP q/q Q2 third: forecast -0.6%

Fixed Income

• US Treasures surged as markets rallied hard in response to the Bank of England’s intervention to support gilt markets. Yields on the 2yr UST dropped 15bps to 4.1349% while the 10yr UST yield fell by 21bps to 3.7312% at the close, after having breached above 4% at one point. Gilts were of course the main mover overnight as the responded massively positively to the BoE’s unlimited buying plan. The 2yr gilt yield dropped 40bps to 4.154% while the 30yr yield dropped more than 100bps to 3.916% though given the plans focus on longer dated bonds.
• The BoE’s intervention spared a rally across nearly all asset classes including European bond markets. German 10yr bund yields dropped by 11bps to 2.1% while Italian yields fell more than 22bps to 4.506%.
• Emerging markets saw less benefit though. South African 10yr yields added 3bps to 11.245% while the 10yr Turkey yield rose by 14bps to 11.55%.

FX

• Currency markets swung against the dollar in a major way after the Bank of England stepped into to halt losses in gilt markets. After initially spurning the move, GBPUSD then rallied, rising by 1.45% on the day to 1.0889 though it is declining in trading today. EURUSD added 1.48% to settle at 0.9735 while USDJPY fell by 0.4% to 144.16.
• Commodity currencies also caught a substantial bid with USDCAD closing lower by 0.9% to 1.3608, AUDUSD up by 1.35% to 0.6522 and NZDUSD added 1.6% to 0.573.

Equities

• Equity markets spiked as bullish sentiment returned following the Bank of England stepping in to support UK bonds. In the US, the Dow added 1.9% while the S&P gained 2% as did the NASDAQ. European equity markets also responded positively, although at a more cautious level. The EuroStoxx index added 0.2% while the FTSE rose by 0.3%.
• Asian markets are trading positively in early moves today with the Nikkei up by nearly 1% while the Hang Seng has added 1.6% and the ASX is rising by 1.5%.

Commodities

• Oil prices rallied along with a broader risk-on move with Brent futures settling up 3.5% to USD 89.32/b and WTI gaining by 4.65% to USD 82.15/b. Apparent sabotage on the Nord Stream pipeline has also thrust energy markets back into the geopolitical focus: European natural gas futures rallied by 11% overnight.
• Commercial crude inventories fell by 4.8m bbl last week while there was also decent draws in gasoline and distillate stock piles. Oil production fell by 100k b/d to 12m b/d and is likely to dip again over a coming few data prints as Hurricane Ian makes landfall in the Gulf of Mexico region.

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