The share markets around the world were also sliding as high-interest rates continued to put pressure on the financial system, while the reaction to Italy’s election result was muted.
The pound plunged below 1985 lows, quickly triggering a sell-off and hitting $1.0327. Moves in the currency were exacerbated by thinner liquidity for Asia, and it had been last seen trading back up to $1.072
On Friday, British finance minister Kwasi Kwarteng announced that he was scrapping the country’s top rate of income tax and canceled a planned rise in corporate taxes. The move comes after his much-anticipated plan to subsidize energy bills.
The euro, which reached 20-year lows against the dollar on Monday and was down more than 1% against the pound, elevated above its 92.29 pence peak during trading hours.
Rabobank strategist Michael Every in Singapore said, “The market is now treating the UK as if it’s an emerging market.”
If this carries across to European trading, you’re going to get a public statement by the BOE threatening enforcement or another big hike in interest rates.
The decline in the value of currencies caused the yield on the Eurozone’s 10-year gilt to jump 40 basis points to its highest point since 2008. Governments in this region suspended trading in interest-bearing government bonds yesterday.
Germany’s 10-year government bond yield hit its highest point since December 2011, while Italy’s benchmark bond yields reached their highest point since 2013.
Italy’s new prime minister Response
Italy’s new prime minister Teresa Mason-Rausi has taken key actions in alignment with the situation she has found herself in, rather than an outsize response to this recent election which will see Giorgia Meloni become Italy’s first woman premier.
“I think it’s fair to say that this election has been seen as largely predictable,” said Giuseppe Sersale, fund manager and strategist, Anthilia Capital Partners. The right-wing League party came out weaker than expected.
“The market anticipated this outcome because it has shifted its focus to economic growth and monetary policy deductions, as well as public finances.” .These are still an unclear path for Italy.”
Unnerving moves by investors have fuelled a global financial market crisis. The pound’s plunge is only the latest example.
European stock markets declined on Monday as European manufacturing data was less impressive than expected.
Commodity stocks, financials, and mining stocks led the decline as these are particularly exposed to a recession.
The broadest index of Asia-Pacific stocks outside of Japan was down 1.4% to a two-year low and is heading for a monthly loss of 11%, the largest since March 2020.
Pressure On Oil And Gold
The US dollar strengthened, resulting in significant downward pressure on oil and gold. Gold dropped to 2.5-year lows of $1,626 and for Brent crude futures the price was down four-tenths of one percent, reaching its lowest since January which was at $85.06 per barrel.
“Monetary policy is the only tool that central banks have for raising prices,” noted Samy Chaar, chief economist at Lombard Odier. “They raise rates to drive their monetary policy into the restrictive territory and then let inflation fall as a result.”
“The global financial system is on the verge of collapsing with fundamental systems failing to uphold transactions made over it. Despite this precarious start, Sterling is a litmus test for how others like it might fare against cryptocurrencies when these marketplaces exceed conventional global financial markets.”