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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
UK chancellor Rachel Reeves is, as we’ve previously noted, not having a wonderful week.
Wednesday was a bad day for Great British assets: sterling and gilts both fell at the same time, which is generally and reasonably seen as being not good. Barclays’ economists write that Reeves’ fiscal headroom will be simply “gone” unless there’s a rapid reversal in yields. Womp womp, who needs public services anyway?
Deutsche Bank — whose house view that this is part of a sustained decline for sterling we covered yesterday — has offered more thoughts in a further note this morning, saying “we think there’s further to go in the recent pound weakness”.
Forex strategist Shreyas Gopal writes:
The last time sterling fell this sharply was in the immediate aftermath of the UK budget in early November, and we recommended fading the move. This time is different…
…the pound is losing its recent sources of support: the current account deficit is likely no longer improving, and volatility-adjusted yield pickup is at risk of worsening further.
To illustrate this point, they’ve produced the following chart:
As you can hopefully see, Wednesday was indeed a tough day on the markets by Reeves’ recent standards, which has taken yields to multi-decade highs and provoked some chin-stroking.
In some corners, this has led to comparisons with the events of autumn 2022, and a suggestion that Reeves may be having a Liz Truss / Kwasi Kwarteng moment. This is obviously bollocks, but how obviously bollocks?
To show how obviously bollocks, we’ve recreated the Deutsche chart above, extending it to cover every day for which Bloomberg holds data going back to the start of 2016.
Note that we’ve swapped the direction of the X-axis, so the pound down / gilt yields up days are towards the bottom left instead. You can use the drop-down or click on the legend to filter through chancellors:
Obviously, this is flawed for a number of reasons (the inherent nature of relative changes, the lack of macro context, the entire premise etc.), but what analysis isn’t? We could also be accused of whataboutery, to which our answer is “absolutely yes, but we didn’t start it”.
Kwarteng ends up getting some representation on both sides thanks to some rebounds (unhappily for him, they’re the day the Bank of England intervened in the wake of the mini-Budget, and the day reports emerged that he would shortly be sacked), but it’s nice to be reminded that no matter how bad things feel, they have and could be much worse.
