LONDON (Reuters) - British finance minister Kwasi Kwarteng on Friday unveiled a broad set of measures aimed at cutting taxes and energy bills for households and businesses to try to drive economic growth that would require a huge increase in borrowing.
UK gilt yields surged by the most in a day in well over a decade as the UK Debt Management Office laid out plans for additional issuance to fund the planned spending, while the pound hit new 37-year lows against the dollar.
Britain's blue-chip stocks remained mired in the red, in line with a broader equity-market decline.
BONDS: Two-year gilt yields rose by nearly 50 basis points at one point, to a high of 3.997%, set for their biggest one-day rout since late 2009, while five-year yields soared by half a percent, marking their largest one-day rise since the early 1990s.
FOREX: Sterling dropped 1.7% on the day to around $1.1064, having hit a new 37-year low earlier on.
STOCKS: The FTSE 100 was last down 2.1% on the day, around its lowest since early March, in the immediate wake of Russia's invasion of Ukraine. But not all sectors were under water. British homebuilders and household goods makers rallied, buoyed by the prospect of consumers getting extra cash via tax breaks.
BROWN BROTHERS HARRIMAN FX STRATEGISTS, NEW YORK:
"(Prime Minister Liz) Truss is taking a huge gamble. While tax cuts are very popular with the Tories and helped her win the leadership, we suspect it will end up being a harder sell for the general populace if the economic outlook continues to deteriorate.
"The next general election is due by January 2025 and this long-term fiscal experiment may end up in tears over the next 12-18 months. For now, the market is voting with their feet as sterling tumbles and gilt yields spike. This is only likely to get worse."
BETHANY PAYNE, GLOBAL BOND PORTFOLIO MANAGER, JANUS HENDERSON INVESTORS:
"As things stand this is the biggest move in five year gilts in ten years. This huge fiscal event is a radical economic gamble; a 'Go big or go home' gamble that will put UK debt on an unstable footing.
"We had been concerned over the ability of the Bank of England to sustainably sell gilts through the quantitative tightening due to start on 3 October, but today we are asking whether quantitative tightening is over before it even began."
MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON:
"It seems that the bounce on higher-gilt yields was little more than a short-lived sugar rush for the pound, with the reality of higher borrowing, and a larger budget deficit now starting to sink in. The tax-cutting budget and ‘go for broke’ growth aims are unlikely to change the longer-term bearish GBP trend."
DAVID PAGE, HEAD OF MACRO RESEARCH, AXA INVESTMENT MANAGEMENT, LONDON:
"The market reaction is of course the most interesting. This is clearly something that suggests a significant amount of extra gilt borrowing, but at the same times it’s fiscal stimulus at a time when the Bank of England is already worried about aggregate demand being too high, and it’s highly likely to force the Bank of England to raise rates even more than we thought they were going to otherwise.
"In terms of sterling, the reaction is more interesting. If you get more fiscal stimulus and less monetary stimulus, that’s something that’s buoyant for the currency. But one also has to look at the current account deficit, which is now not going to narrow quite as much. So there is a question mark over the UK’s external position which questions the longer-term position of sterling."
MUBIN HAQ, CHIEF EXECUTIVE, ABRDN FINANCIAL FAIRNESS TRUST:
"Today’s mini-budget delivered mini gains for those living on the margins, but maximum rewards for those with the highest incomes and significant assets. Our research shows 4.4 million households are already in serious financial difficulties and few see their prospects for being able to pay their bills improving.
"Help should have been laser focussed on those hardest-hit by the cost of living crisis as the economy enters into recession."
CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP, LONDON:
"The Chancellor (and the new PM) appear to be betting the house on an economic rebound following on from his tax cuts and changes to planning. But while shareholders in housebuilders might be cheering, the new government has driven a coach and horses through the next few years of planning assumptions.
And the move to remove the top rate of tax gives Labour an easy shot at the next election, especially when the bonus cap removal is taken into account too. Gilt yields are up even in the minutes after the statement, showing that the government will have to pay more for its borrowing, a clear sign of market unease."
TREVOR GREETHAM, HEAD OF MULTI-ASSET, ROYAL LONDON, LONDON:
“Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary global financial crisis, when borrowing costs were low and private sector balance sheets were deleveraging.
“Now with spare capacity non-existent, inflation at a forty year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride.”
(Reporting by London Markets Team; Editing by Dhara Ranasinghe and Amanda Cooper)