The Cambridge Weekly – 3rd October 2022

Loss of trust

Last week provided the evidence for the fragility of capital markets as they grappled with the strain of transitioning from an ultra-low interest rate environment, back to the one we knew before the global financial crisis of 2008. A policy mistake around the smaller part of the UK government’s fiscal measures aimed at fending off a looming recession, rattled international capital markets to such an extent that it is now likely to create far more headwind than support for the UK’s economy in the winter ahead.

Gilt market post-mortem

Britain’s most recent chancellors have had tough starts. Rishi Sunak strolled into 11 Downing Street on the eve of the pandemic and was quickly forced to unveil billions in emergency spending measures. Nadhim Zahawi, his short-lived successor, came on board as Boris Johnson’s ship was sinking – and publicly denounced his captain just 48 hours later. But if those two endured trials by fire, Kwasi Kwarteng’s tenure looks like a trial by firing squad.

Global bond market rout – a perspective

Bond traders are still reeling from events last week. The UK government delivering the biggest tax cuts in decades – without any indication how fiscal prudence will be regained down the line – sent gilt yields soaring. But the fallout stretches far beyond London. Earlier last week, Raphael Bostic, President of the Atlanta branch of the US Federal Reserve (Fed), noted global markets were feeling “increased uncertainty” in the wake of Britain’s surprise fiscal loosening. Asked whether the situation increased the risk of a global recession, Bostic lamented: “I think it doesn’t help”.