Sterling hits record low; risk of BOE response
Euro hits 20yr low, yen sliding despite intervention
Asia markets fall and S&P 500 futures drop 0.6%
SYDNEY/LONDON, Sept 26 (Reuters) - Sterling slumped to a
record low on Monday, and a renewed selloff in British gilts
pushed euro zone yields higher as the fall out from last week's
fiscal statement in Britain roiled markets for a second session.
Share markets around the world also slid as concerns about
high interest rates continued to put pressure on the financial
system, though in a rare recent example of a news event having a
smaller market impact than feared, reaction to Italy's election
result was muted.
The pound plunged nearly 5% at one point in Asia
trade to break below 1985 lows and hit $1.0327. Moves were
exacerbated by thinner liquidity in the Asia session, and the
currency had last clambered back up to $1.072.
British finance minister Kwasi Kwarteng on Friday announced
he was scrapping the country's top rate of income tax and
cancelled a planned rise in corporate taxes - on top of a hugely
expensive plan to subsidise energy bills.
The euro, which fell to its own 20-year low on the dollar on
Monday was nonetheless up over 1% on the pound at 90.21 pence,
having been as high as 92.29 pence early in the day, its highest
since Dec. 2020.
"The market is now treating the UK as if it's an emerging
market," said Rabobank strategist Michael Every in Singapore.
"If this carries across into European trading you're going
to get at a minimum a public statement from the BOE threatening
(action) and...a strong possibility that they have to make an
inter-meeting hike, and a chunky one at that."
The carnage was not confined to currencies. Five-year gilt
yields jumped more than 40 basis points to their
highest since October 2008, sending Euro zone government bond
Germanys 10-year government bond yield hit its highest
since December 2011 at 2.128%, and Italy's benchmark
bond yields rose to their highest since 2013.
Those moves were in line with the overall picture, rather
than an outsized response to Sunday's election after which
Giorgia Meloni looks set to become Italy's first woman prime
minister leading its most right-wing government since World War
"There are no big surprises. I expect a relatively small
impact considering that the League, the party with the least
pro-European stance, seems to have come out weak," said Giuseppe
Sersale, fund manager and strategist, Anthilia Capital Partners,
referring to a separate right-wing party lead by Matteo Salvini.
"The market knew this was how it was going to end, and will
remain focused at this stage on economic growth, monetary policy
tightening and public finances, which remain a slippery slope
The pound's plunge is only the latest unnerving move as
investors' skittishness strains global financial markets.
Two-year Treasury yields broke above 4.3% to a
new 15-year high, and while moves in European share markets were
less dramatic than bonds and currencies, Europe's STOXX 600
index slipped for the third straight session on Monday,
falling to a new low since December 2020.
Commodity stocks and mining led the declines
as these are particularly exposed to a recession.
MSCI's broadest index of Asia-Pacific shares outside Japan
was down 1.4% to a two-year low and is heading
for a monthly loss of 11%, the largest since March 2020.
Oil and gold were under pressure due to the surging
greenback, with gold hitting a 2-1/2 year low of $1,626
and Brent crude futures last down about 0.5% having
earlier fallen to their lowest since January at $85.06 a barrel.
"There has been an economic logic at play, as central banks
raised rates to drive monetary policy into restrictive
territory, get below trend growth for a while, - a polite way of
saying a recession - and then you get lower inflation," said
Samy Chaar, chief economist at Lombard Odier.
"The question is whether the financial world can go through
that sequence. It feels like we are reaching the limit of that,
things are starting to break, for example what we see with
(Additional reporting by Danilo Masoni in Milan; Editing by Sam
Holmes, Ana Nicolaci da Costa and Hugh Lawson)