‘Great British Peso’ Plummets To 13-Month-Low As Investors Lose Faith In The UK

Another day, another pummeling for the pound…

No relief in sight for UK markets this morning with traders sending stock markets lower, gilt yields higher, and cable below 2024 lows.

This is the fourth day of losses on concern the Labour government will struggle to keep the deficit in check as borrowing costs surge.

That smashed the pound to its weakest since Nov 2023…

Source: Bloomberg

The UK’s domestically-focused FTSE 250 Index fell as much as 1.1% to the lowest since April, and was on course for its worst three-day drop since August.

The FTSE 100, which is comprised of large, internationally-geared stocks, outperformed, rising 0.6% as its companies benefit from a weaker pound.

“The worry is that investors have just lost faith in the UK as a place to put their assets,” said Eva Sun-Wai, a fund manager at M&G Investments, on Bloomberg Radio.

The speed of the moves has seen comparisons drawn to the fallout from Liz Truss’ ill-fated mini-budget in 2022, and prompted questions to UK lawmakers in Parliament, but – ever in search of a silver lining – while gilts opened with yields dramatically wider, they have been bid since the open and are now lower on the day…

Source: Bloomberg

Compounding the gilt market’s problems are changes in the pension industry as their investment goals shift, historically a major buyer of UK government debt.

“Markets are rightly nervous about depth of demand for gilts,” said Giles Gale, a strategist at UBS.

“Fixed income weakness has been a global theme, but sentiment on the UK is particularly vulnerable.”

But, as Bloomberg reports, Sun-Wai added the pound’s drop despite a surge in yields can be seen as a signal of capital flight, as normally higher returns would make a currency more attractive.

The move prompted jokes in the City and beyond, with Citigroup describing sterling as the “Great British Peso” – a reference to a more volatile emerging-market currency.

“The pound could remain the preferred pressure valve for anxious investors who worry about the outlook of their UK portfolios,” said Valentin Marinov, head of Credit Agricole’s Group-of-10 FX strategy in London.

“Markets are quite skittish at the moment. FX traders will continue to ‘milk’ the heightened FX volatility for whatever it’s worth.”

But, traders should have no fear because Treasury officials have assured the public that the move as “orderly“…

Add that words to the list: “contained” and “transitory“…