Morning show: Uneasy cable | Reuters

US dollar banknotes are shown in this illustrative photo taken on June 14, 2022. REUTERS/Florence Law/Illustration

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A look at the day ahead in the US and global markets from Mike Dolan.

Britain’s gamble to stimulate growth through unfunded tax cuts to increase inflation has turned into a real crunch for the pound and UK government bonds, with questions for all governments seeking more debt-financed economic support.

With the US dollar already rampant around the world, the GBP/USD rate – nicknamed “the cable” by traders – entered a hypothetical free-fall early Monday.

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Foreign investors ran to the exit after the new government’s fiscal plan on Friday threatened to stretch Britain’s finances to their limits, and Finance Minister Kwasi Quarting promised more tax cuts at the weekend. Read more

Sterling, which has made nearly 10% from a peak to a week-long low against the dollar, fell nearly 5% early on Monday to a record low against the dollar at $1.0327, breaking an all-time low. $1.0520 from 1985. While it regained some of those gains with the opening of trading in London, it remained down another 1% from Friday and down nearly 1% against the euro as well.

The pound’s decline comes ahead of this week’s big auctions of both long-term and inflation-linked UK government bonds and increased liquidity issues in the gold markets. Read more

The scale of the pound’s losses and financial concerns have many traders speculating an emergency interest rate hike by the Bank of England. Rate futures are now priced up three-quarters of one point to 3% on or before the Bank of England’s next meeting on November 2.

UK 10-year Treasury yields cross 4% for the first time in 12 years, and the gold-yield premium on German bonds is now at a full 2 ​​percentage points for the first time in 31 years – levels not seen since just before the pound. He was expelled from the pre-euro European currency network system, the Exchange Rate Mechanism, in 1992.

The yield on Britain’s two-year Treasuries rose above 4.5% – up 150 basis points this month and the highest since 2008, reflecting mounting recession fears. . 2008.

Although relatively slight compared to the decline of the pound, the euro also fell against the dollar after the Italian general elections at the end of the week that looked on the verge of entering the most right-wing coalition government since World War II. Read more

Italian 10-year government bond yields are up nearly 4.5% and are at their highest since 2013, in the wake of the euro’s sovereign debt crisis.

But the move reversed a public selloff in bonds, and in stark contrast to British government bonds, yield premiums on German bonds were little changed as of Friday as the right-wing coalition looked less than a two-thirds parliamentary coalition allowed to change the constitution without a referendum.

The pressure of the dollar escalated everywhere.

After last week’s dramatic intervention to buy the yen in open markets, Japanese Finance Minister Shunichi Suzuki continued to warn that the country would once again act to calm what it saw as excessive moves in the FX market. Read more

China also acted differently on Monday to stem the yuan’s continued slide against the dollar. From Wednesday, the People’s Bank of China will raise the foreign exchange risk reserves of financial institutions when buying foreign currencies through forward currency to 20% from the current zero.

With recession approaching and inflation and interest rate pressures worsening, indicators from European companies are dwindling and the German Ifo Business Survey for September was well below expectations. Read more Warning of an upcoming global deflation, the Organization for Economic Co-operation and Development said central banks need to continue fighting inflation and saw US Federal Reserve interest rates rise to 4.75% next year. Read more

As we approach the end of the third quarter, the S&P500 has remained in the red for three months and is set to post its third consecutive quarterly loss since the aftermath of the Lehman Brothers collapse in 2008.

Key developments that should provide further guidance to US markets later on Tuesday:

* Dallas Fed Fed Manufacturing Index for the month of September; Chicago Fed Activity Index for August

* Atlanta Federal Reserve Chairman Speaks

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Written by Mike Dolan, Editing by William MacLean . Twitter: @reutersMikeD

Our criteria: Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed under the Trust Principles to impartiality, independence, and freedom from bias.

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