2022 has seen a period of increased volatility worldwide. Investors are focused on central banks raising rates, with markets already factoring in a 75-basis point hike by the U.S. Federal Reserve. The latest Consumer Price Index report showed inflation rising faster than expected, and while conversely the equity markets are staging a small rally, many major US names that are often seen as safe havens, including the likes of Netflix, Tesla, Apple and Meta, are down 30%-60% from 52-week highs.
Within this global backdrop, the UK has suffered extreme volatility in the wake of the resignation of Prime Minister Boris Johnson in July.
It started with an idea formed from basic assumptions by the new leader of the UK Government, Liz Truss, and her new chancellor, Kwasi Kwarteng; Cutting tax would lead to increased consumer spending, boosting growth and counter slowing activity and rising inflation. Plus, lower taxes tend to increase the government’s tax receipts longer-term, rather than reduce them.
The market reaction was immediate and negative, with concerns weighing on UK assets and the British Pound losing value overnight, adding to the cost of importing any goods of services, introducing the risk of an inflation spiral. Add in the deepening energy crisis, most of which is priced in USD and the UK is facing a double whammy which could tip the nation into a recession this winter.
This created massive upheaval in the UK markets. Whilst the British Pound stabilized against the U.S. dollar, there was a large selloff in long-dated UK government bonds (Gilts) as investors scrambled for cover trying to free up cash. The tax cuts would need to be paid for which would likely mean a more aggressive approach to interest rate rises.
The Bank of England (BoE) stepped in, immediately purchasing gilts to ensure stability in the value of both the British Pound and UK government treasuries. The Chancellor was forced to revise or cancel many elements of the spending package, scrapping plans for tax cuts for Britain’s highest earning citizens. However, UK markets remained in turmoil. The BoE have stopped propping up the gilt market in order to concentrate on controlling the double-digit inflation that the country now faces.
Ultimately the UK Government leaders stood down after just 44 days in power. Wind forward just 5 days and a new leader, Rishi Sunak and his cabinet, are in power, reversing almost all of the previous teams' decisions with immediate effect.
Overall, the situation remains complex and fast-moving. Global markets are likely to remain volatile and turbulent, emphasizing the need for discipline from the investors and control by the Banks and Brokers that service them. KRM22’s customers have been able to use our products to manage their risk effectively. The Market Surveillance product has supported firms concerned about market abuse during the gilt run and the Market Risk suite has helped those concerned about the effect of increased volatility on the derivatives and equities markets. Meanwhile, other customers have been able to use the Risk Cockpit to track clearing and settlement without interruption during this time.
We do not know what tomorrow brings, but with the right partners, services and infrastructure we can make sure that we are ready for it, and be ready for whatever the day after that brings as well.