Marketmind: A bitter pill from the Bank of England?

Marketmind: A bitter pill from the Bank of England?


A look at the day ahead in European and global markets from Tom Westbrook

Sterling rebounded 4.5% from Monday’s low in almost as alarming fashion as its decline. Support is withdrawn from the gilded market path.

The two- and five-year Treasury yields rose by 100 basis points in two days. The cost of money is moving too fast for the mortgage to keep up, and they’ve pulled the products to re-price.

The Bank of England said it would not hesitate to raise interest rates. What that means, exactly, will be tested starting at 1100 GMT when Chief Economist Howe Bell appears at a panel session.

He must be asked if the tax cuts and subsidies imposed by Finance Minister Kwasi Kwarting are making his job more difficult, and requiring higher rates. 125 basis points of gains were priced into the markets by November – indicating the risk of an off-schedule rally.

It’s a quandary because converting the pound will require shock and awe, but the Bank of England will not want to explode all of its ammunition at once.

The implied volatility in options pricing suggests markets are preparing for a wild ride during October – when rating agencies prepare to revise Britain’s outlook – and November, when Kwarteng promised details of debt reduction.

Asia took profits on Tuesday from the US dollar’s rally and lifted a bit in stock futures, but signs of stress abound.

The pace of profit decline in Chinese industrial companies is increasing.

Japan honors the assassinated leader Shinzo Abe at a state funeral in Budokan in Tokyo, while his legacy of massive stimulus still looms over the bond market. More non-scheduled bond purchases were needed to keep 10-year interest rates below their ceiling.

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Florida is preparing for a hurricane.


Key developments that may affect the markets on Tuesday:

Speakers: BoE economist Howe Bell, Luis de Guindos of the European Central Bank, Charles Evans of the Fed

Economics: Eurozone money supply, Hungary, Moroccan central bank meetings, 5-year bond auctions in Germany and the US, US durable goods, house prices.

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