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LONDON, Oct 14 (Reuters) – British Prime Minister Liz Truss and new finance minister Jeremy Hunt will have to do a lot more than Friday’s U-turn on corporation tax to restore Britain’s credibility with financial markets after three bruising weeks.

Truss and Hunt, a former foreign minister, will be looking to Oct. 31 – the date of the government’s medium-term budget plan announcement – as a moment to win back the trust of investors.

The pound and British government bond prices rose on Thursday and Friday in anticipation of the policy shift, but they retreated after Truss gave a short news conference on Friday, which underwhelmed analysts.

“Undertaking a U-turn that is forced doesn’t really give the impression that Liz Truss is driving forward with a credible policy plan but rather reacting to developments as they unfold, which itself doesn’t engender much confidence,” said Richard McGuire, head of rates strategy at Rabobank in London.

As Truss spoke on Friday gains made in anticipation of the corporation tax U-turn faded.

Ten-year gilt yields were 40 bps above session lows hit earlier on Friday, also pushed up by moves in bond yields globally. This puts them some 80 bps above their levels before the government’s mini-budget on Sept. 23 that triggered the recent turmoil.

The pound fell more than 1% against the dollar and remains 0.6% below its pre-Sept. 23 levels.

Investors and analysts said the reinstating of a previously scheduled corporate tax hike did little to resolve the challenges the “mini-budget” had originally introduced.

Paul Dales, chief UK economist at Capital Economics, called Friday’s move a “mini-U-turn,” noting there were still 25 billion pounds (USD 28.07 billion) of unfunded tax cuts remaining, down from 45 billion pounds in the original plan.

Without further changes the Office for Budget Responsibility – Britain’s fiscal watchdog – will say a 43-billion-pound hole in the public finances will need to be filled to put the debt-to-GDP ratio on a falling path in three years, he estimated.

Focus also turned to growing political instability with the fourth finance minister in as many months appointed in a country grappling with a cost-of-living crisis, and some questioned how long Truss herself could stay in office.

“Markets are potentially seeking out a hard reset back to square one. Like we’ve seen in Greece and Italy, the market can force a change of leadership if necessary,” said Janus Henderson portfolio manager Bethany Payne.

UNDERWHELMED

Britain’s mini-budget three weeks ago triggered some of the biggest ever jumps in British bond yields, exposed vulnerabilities in the pensions sector — undermining the country’s financial stability.

Sterling, already hurt by a strong dollar, fell to record lows, creating another headache for the Bank of England which is has accelerated the pace of its interest rate increases in a bid to tackle an inflation rate running at nearly 10%.

The BoE was also forced to carry out a round of emergency bond-buying which ended on Friday, leaving many investors anxious about what might happen next week.

“These sudden changes of policy both from the government and the central bank raise uncertainty for market participants potentially stalling or deterring investment, which has been weakening since Brexit,” said Ken Egan, director of European sovereign credit at Kroll Bond Rating Agency.

“How it impacts liquidity on the gilt market going forward is something we are monitoring closely.”

Nomura said sterling’s decline was unlikely to slow until economic growth rebounds. It forecasts a fall in sterling to USD 0.975 by year-end. The pound was trading at around USD 1.1191 and is already down 17% against the dollar this year.

NatWest Markets also suggested Friday’s announcement would do little to tame gilt yields. A roughly 20 billion-pound reduction in funding needs over the next two years — Friday’s measures are expected to raise 18 billion pounds — would be worth only 30 bps off the 10-year gilt yield, which has already been more than priced in, its economists said.

Rabobank’s McGuire said pressure on UK assets could lead the BoE to re-intervene in the bond market or delay its quantitative tightening, bond-selling plans.

Investors may need more reassurance, especially given the scale of Britain’s six-month, 60 billion-pound energy support package, fund managers said.

“Thus far, the investment community has been underwhelmed by the move on corporation tax and is looking for a more substantive ‘U-Turn’ in order to restore fiscal credibility,” said Mark Dowding, chief investment officer at BlueBay Asset Management.

“A windfall tax to reduce the cost of the energy price cap will be required along with further steps,” he added.

(USD 1 = 0.8908 pounds)

(Reporting by Yoruk Bahceli, Dhara Ranasinghe, Nell Mackenzie, Harry Robertson, Editing by William Schomberg and Jane Merriman)

 

Oct 14 (Reuters) – Gold prices fell more than 1% on Friday and were headed for their worst week since mid-August, dragged lower by a stronger US dollar and worries the Federal Reserve will persist with sharp rate hikes to curb inflation.

Spot gold had fallen 1.3% to USD 1,643.90 per ounce by 13:42 p.m. EDT (1742 GMT), down about 2.9% so far this week. US gold futures settled 1.6% lower at USD 1,649.50.

The US dollar rose over 0.6% against its rivals, making greenback-priced bullion more expensive for overseas buyers.

Gold prices are increasingly correlated with the moves in the dollar and could fall to as low as USD 1,600 an ounce, said Daniel Ghali, commodity strategist at TD Securities.

Data on Thursday showed US consumer prices increased more than expected in September, providing ammunition to the Fed to deliver another big rate hike, and consequently setting up what could be gold’s worst week in nearly two months.

Gold is highly sensitive to rising US rates, which boost bond yields, increasing the opportunity cost of holding non-yielding gold.

Bullion shed as much as 1.8% on Thursday before recovering to end the session 0.4% lower as the dollar lost ground after initially spiking following the inflation report.

“A rebound of that magnitude (for gold) after that inflation report was strange to say the least,” said Craig Erlam, senior market analyst at OANDA. “Gold moving lower again today is more in line with what we learned from the data.”

Benchmark US 10-year Treasury yields firmed, further weighing on gold.

Silver fell 3.5% to USD 18.22 per ounce, and was set for its biggest weekly drop since September 2020.

Platinum dipped 0.3% to USD 893.99 per ounce, while palladium fell 4.9% to USD 2,003.38. Both remain on course for weekly declines.

(Reporting by Bharat Govind Gautam and Brijesh Patel in Bengaluru; Editing by Tomasz Janowski and Vinay Dwivedi)

 

LONDON, Oct 14 (Reuters) – Investors with classic “60/40” portfolios are facing the worst returns this year for a century, BofA Global Research said in a note on Friday, noting that bond markets continue to see huge outflows.

“2022 (is) a simple tale of “inflation shock” causing “rates shock” which in turn threatening “recession shock” & “credit event”; inflation shock ain’t over,” BofA said in its weekly “Flows Show” report.

Soaring inflation, rising interest rates, war in Europe and an energy crunch have seen valuations plunge across asset classes in 2022.

The S&P 500 index of shares is down around 23% this year, having shed 15% since mid-August alone.

Hopes that inflation may be receding were dashed on Thursday after data showed U.S consumer prices increased faster than expected in September, reinforcing expectations that the Federal Reserve will deliver another 75-basis points interest rate hike next month.

Using data from EPFR, BofA said investors have sold bonds for eight consecutive weeks, while European equity funds have seen outflows for the 35th straight week.

So-called “60/40” portfolios typically have 60% of their holdings in stocks and the remaining 40% in fixed income.

BofA said annualised returns so far in 2022 on portfolios like these are the worst in the past 100 years, while those on “25/25/25/25” portfolios that hold equal portions of cash, commodities, stocks and bonds have dropped 11.9%, the worst sinced 2008.

Equity funds recorded USD 0.3 billion of inflows during the week to Wednesday while bonds saw massive outflows of USD 9.8 billion.

It was the sixth week in a row that investors sold financials, the first outflow from infrastructure in 11 weeks and the 18th week of outflows from bank loans, Bofa said.

Bofa’s bull & bear indicator remains at “max bearish” for the fourth consecutive week.

Anticipation that inflation will fall and the fact that in 2023 inflation will be expected rather than unanticipated is good news, Bofa said.

(Reporting by Lucy Raitano; Editing by Amanda Cooper)

 

NEW YORK, Oct 14 (Reuters) – Oil prices plummeted more than 3% on Friday as global recession fears and weak oil demand, especially in China, outweighed support from a large cut to the OPEC+ supply target.

Brent crude futures dropped USD 2.94, or 3.1%, to settle at USD 91.63 a barrel, while US West Texas Intermediate (WTI) crude futures fell USD 3.50, or 3.9%, to USD 85.61.

The Brent and WTI contracts both oscillated between positive and negative territory for much of Friday but fell for the week by 6.4% and 7.6%, respectively.

US core inflation recorded its biggest annual increase in 40 years, reinforcing views that interest rates would stay higher for longer with the risk of a global recession. The next US interest rate decision is due on Nov. 1-2.

US consumer sentiment continued to improve steadily in October, but households’ inflation expectations deteriorated a bit, a survey showed.

The improvement in consumer sentiment “is being viewed as a negative because it means the Fed needs to break the spirit of the consumers and slow the economy down more, and that’s caused an increase in the dollar and downward pressure on the oil market,” said Phil Flynn, analyst at Price Futures Group in Chicago.

The US dollar index rose around 0.8%. A stronger dollar reduces demand for oil by making the fuel more expensive for buyers using other currencies.

In US supply, energy firms this week added eight oil rigs to bring the total to 610, their highest since March 2020, energy services firm Baker Hughes Co said.

China, the world’s largest crude oil importer, has been fighting COVID-19 flare-ups after a week-long holiday. The country’s infection tally is small by global standards, but it adheres to a zero-COVID policy that is weighing heavily on economic activity and thus oil demand.

The International Energy Agency (IEA) on Thursday cut its oil demand forecast for this and next year, warning of a potential global recession.

The market is still digesting a decision last week from the Organization of the Petroleum Exporting Countries and allies, together known as OPEC+, when they announced a 2 million barrel per day (bpd) cut to oil production targets.

Underproduction among the group means this will probably translate to a 1 million bpd cut, the IEA estimates.

Saudi Arabia and the United States have clashed over the decision.

Meanwhile, money managers raised their net long US crude futures and options positions by 20,215 contracts to 194,780 in the week to Oct. 11, the US Commodity Futures Trading Commission (CFTC) said.

(Reporting by Stephanie Kelly in New York; additional reporting by Shadia Nasralla in London, Emily Chow in Singapore; Editing by David Evans, Will Dunham and Marguerita Choy)

 

Oct 14 (Reuters) – Gold prices fell on Thursday as a higher-than-expected rise in US September inflation cemented bets the Federal Reserve will persist with aggressive interest rate hikes.

Spot gold dropped 0.3% to USD 1,666.77 per ounce by 12:42 p.m. EDT (1642 GMT). US gold futures settled almost flat at USD 1,677.00.

The US consumer price index (CPI) rose 0.4% last month after gaining 0.1% in August, the Labor Department said. In the 12 months through September, the CPI rose 8.2% after gaining 8.3% in August.

The data signals the Fed will be more aggressive in fighting inflation by raising interest rates at a faster pace, pressuring gold, said David Meger, director of metals trading at High Ridge Futures.

Following the data, benchmark US 10-year Treasury yields climbed. Higher interest rates and bond yields lower the appeal of non-yielding gold.

“There was some optimism going into the report that we had seen consumer prices abate and with the news coming out that was not the case, we saw the obvious result of that,” Meger said.

Traders of US interest-rate futures had all but priced in a fourth straight 75-basis-point hike at the close of the Fed’s Nov. 1-2 meeting, after the inflation data they began pricing about a one-in-10 chance of a full percentage-point rate hike next month.

Fed officials reiterating their aggressively hawkish stance on monetary policy has kept the market uneasy due to fears of a “pending US and/or global recession,” Jim Wyckoff, senior analyst at Kitco Metals, said in a note.

“Today’s CPI report suggests the Fed is correct regarding its belief that inflation is still not under control.”

Spot silver dropped 0.9% to USD 18.87 per ounce, platinum firmed 1.9% to USD 897.00, and palladium dipped 1.3% to USD 2,107.78.

(Reporting by Bharat Govind Gautam in Bengaluru; editing by Barbara Lewis and Vinay Dwivedi)