UK markets in turmoil, with sterling, government bonds, and investor confidence all taking a battering

CP

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The UK markets are in turmoil, with sterling, government bonds, and investor confidence all taking a battering this week – a grim welcome back for Chancellor Rachel Reeves after her much-publicised trip to China.

Pound Plunges to 14-Month Low

Sterling has nosedived to $1.21, marking a 0.8% drop and hitting a 14-month low. This comes just days after Labour touted Reeves’ visit to Beijing as a step towards strengthening Britain’s economic ties. Instead, the markets seem to have taken a very different view, with economists sounding the alarm.

Goldman Sachs has sharply revised its forecast for the pound, predicting it will fall further to $1.20 by year-end – a drastic turnaround from its previous projection of a rise to $1.30.

Gilt Yields Hit Record Highs

It’s not just the pound feeling the pressure. 10-year gilt yields climbed to 4.909% this morning, while 30-year gilt yieldspeaked at a staggering 5.473%—a level not seen in 27 years. Analysts warn that if the 10-year yield breaches the crucial 5% mark, it could spell disaster for Labour’s fiscal strategy.

According to traders, fears are mounting that Reeves will struggle to meet her fiscal rules as borrowing costs continue to spiral. Some are even betting that the pound could lose as much as 8% of its value in the coming months.

Economists Warn of Sterling’s Weakness

The financial community is growing increasingly pessimistic about the UK’s economic outlook. Jamie Niven, a fund manager at Candriam, said the pound’s trajectory looks grim:

“The path of least resistance for the pound would be a fall. On one side, you have very limited pricing in of Bank of England cuts, while the fiscal concerns are also sterling negative.”

Adding fuel to the fire, Deutsche Bank has urged investors to sell the pound, citing worsening market turmoil. Economist Shreyas Gopal warned, “There’s further to go in the recent pound weakness.”

Reeves Faces Mounting Pressure

Reeves’ fiscal rules, already under strain, are now in jeopardy as borrowing costs skyrocket. Labour will be watching the markets nervously, with sources suggesting the Treasury is trying to hold out until March before making any major policy shifts.

But with investor confidence eroding and market sentiment deteriorating, Reeves faces a daunting challenge to stabilise the economy. Any misstep could plunge the UK into deeper financial trouble, and the clock is ticking.

As borrowing costs climb and the pound continues its freefall, pressure is mounting on Rachel Reeves, with calls for her resignation growing louder. Today, Keir Starmer was asked a straightforward question: would Reeves remain Chancellor at the next election? Not once, but twice, Starmer dodged the opportunity to provide a clear answer.

For now, all eyes are on the pound, as Britain braces itself for more economic uncertainty under Labour’s watch.

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This article (UK markets in turmoil, with sterling, government bonds, and investor confidence all taking a battering) was created and published by Conservative Post and is republished here under “Fair Use” with attribution to the author CP

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RELATED

Cabinet told public spending cuts must be ‘ruthless’

Chief Secretary to the Treasury says it is ‘crucial we maximise the value of every pound spent’

BEN RILEY-SMITH

The Treasury has ordered cabinet ministers to be “ruthless” in identifying public spending cuts as Labour battles to prove its economic plan is working.

An internal letter from Number 11 about Rachel Reeves’s spending review, seen by The Telegraph, admits that “difficult” decisions on budgets will be needed.

It comes after a tumultuous week in financial markets, which saw the interest rate on 30-year government bonds hit its highest level since 1998.

Ministers will be braced for more market movements this week. The Chancellor is now under added pressure to find extra savings after the surge in the cost of government debt put her own borrowing rules at risk of being broken.

Sir Keir Starmer will attempt to seize back the economic initiative on Monday with a speech embracing artificial intelligence, vowing to build a new supercomputer in the UK.

The letter from Darren Jones, the Chief Secretary to the Treasury, was sent to cabinet colleagues on Dec 12 and detailed the approach that would be taken in the spending review, which is due to conclude in June.

Mr Jones wrote: “Growth is the only way that we can deliver better outcomes in public services, without raising taxes on working people and is our primary mission for this Parliament.

“Spending Review 2025 cannot be a business-as-usual spending review. Building on our missions, the Plan for Change set out ambitious milestones that must be delivered within the challenging fiscal context we inherited. Success will require ruthless prioritisation.”

Mr Jones also referred to the spending review as “phase two”, coming after the Budget in October, which raised tax by £40 billion and is dubbed “phase one” in the Treasury.

He said: “It is crucial that in phase two we maximise the value of every pound spent to set the Government on course to deliver the Plan for Change, within the spending envelope set at the Autumn Budget. Phase two will, therefore, be zero-based.

“Together, we will conduct a full review of every line of government spending to assess whether it is a priority for this Government and represents value for money. Some of these decisions will be difficult, but the public expects us to root out government waste and ensure their taxes are being spent on their priorities.”

The revealing language shows how firmly the Treasury is pushing other government departments to find savings in their budgets, with a “ruthless” focus on priorities.

The spending review was already expected to require departments to make efficiency savings worth five per cent of their budgets.

Areas directly related to the Plan for Change, the document outlined by Sir Keir Starmer last month spelling out tangible targets for his premiership, are expected to be best funded.

That means efforts to reduce NHS waiting lists, boost early years education, put more police officers on the street, raise household income, build 1.5 million homes and decarbonise the electricity supply will be well financed.

But other areas, such as unprotected government departments that fund the courts, local councils, and welfare support, are more at risk of cuts.

Signs of grumbling in Labour

Ms Reeves in her Budget raised the increase in day-to-day public spending from one per cent a year in real terms inherited from the Tories to 1.5 per cent a year.

However, she spent much of the £40bn raised in her Budget on the NHS and education, as well as front-loading the money over the next two years, meaning much tighter budgets after that.

Economists warned at the time that the budget cuts needed for unprotected departments in the years ahead will feel like Tory chancellor George Osborne’s austerity programme.

Signs of grumbling among Labour colleagues towards Ms Reeves’s economic decisions have been emerging in recent days after a string of discouraging developments.

Business confidence has dropped since Labour took office, while growth forecasts are down and inflation is showing signs of dropping less quickly than hoped.

As well as rising borrowing costs last week, the pound has weakened against other currencies in a sign that international investors are avoiding the UK.

Ms Reeves will give a speech on boosting growth later this month that will see her urge regulators to be more pro-enterprise and champion the major loosening of planning rules.

The Telegraph: continue reading