Pound and UK bonds rally; stocks, futures advance

Bloomberg

The pound rallied and UK bonds surged as more of Prime Minister Liz Truss’s package of unfunded tax cuts were reversed. Stocks rise, with investors preparing for a number of key earnings reports this week.
Chancellor Jeremy Hunt said the UK will raise £32 billion ($36.15 billion) with new measures, scrapping plans to cut income tax and dropping a reduction in dividend taxes. It’s the start of what may be a particularly torrid week for UK assets, with the beleaguered Truss battling to rescue her premiership after the Bank of England ended its emergency bond-buying program on Friday and as mutinous backbenchers plot to oust her.
US equity contracts advanced more than 1% as investors turned their focus to earnings — including from Bank of America Corp, (BofA) Goldman Sachs Group Inc. and Tesla Inc. Utilities and auto stocks led gains in Europe.
The yield on 10-year gilts fall 37 basis points to 3.97% and the pound traded 1.2% higher at $1.1310. Treasury yields and the dollar eased against its Group-of-10 counterparts, providing a touch of respite to harried currency markets.
“I think we’re in for a period where UK credibility is continually questioned and UK assets remain incredibly volatile for a significant period of time,” Benjamin Jones, Invesco Director of Macro Research, said on Bloomberg Television. “Watching the gilt market will be absolutely key in understanding if the market does believe Hunt to be more stable and if he will be able to push these policies through.”
While early gains for pound suggested confidence in Hunt’s alternative approach, economists still warn there is a budget hole ranging from £28 billion to £50 billion to fill, depending on the pace of debt falling.
Meanwhile, the outlook for consumer prices in the US continues to fuel bets that the Federal Reserve may make jumbo rate hikes at its next two meetings, weighing broadly on the outlook for global economic growth and markets.
Fed officials in their latest comments suggested they were ready to hike rates higher than previously planned. Kansas City Fed President Esther George said the terminal rate may need to be higher to cool prices. San Francisco Fed’s Mary Daly said she’s “very supportive” of raising to restrictive levels and to between 4.5% and 5% “is the most likely outcome.”
Morgan Stanley strategist Michael J. Wilson, a long-time equities bear, said US stocks are ripe for a short-term rally in the absence of an earnings capitulation or an official recession. A 25% slump in the S&P 500 this year has left it testing a “serious floor of support” at its 200-week moving average, which could lead to a technical recovery, he wrote in a note on Monday. Elsewhere in markets, oil fluctuated after a weekly slump as fears over an economic slowdown continue to weigh on the outlook for demand. Gold rose on weakness in the US dollar and as rising fears of a global economic slowdown boost the precious metal’s haven status.
Futures on the S&P 500 climb 1.3% as of 6:20 am New York time and futures on the Nasdaq 100 rise 1.5%.
While futures on the Dow Jones Industrial Average rose 1.1%, the Stoxx Europe 600 rises 0.8% and the MSCI World index was little changed.
While the Bloomberg Dollar Spot Index falls 0.4%, the euro rises 0.4% to $0.9760.