The Bank of England has arrived at the last minute to save the difficult situation created by the newly formed British government's decision to increase public spending while significantly reducing tax pressure.
The announcement of this economic policy measure sparked massive turbulence not only in the British market but also in global markets. The most distorting effect was seen in UK bonds, which tumbled to new lows in a single trading session. This jeopardized the stability of pension funds that were primarily invested in long-term bonds and were about to be forced to block the funds due to trading margin exhaustion.
The Bank of England's announcement and subsequent action of buying bonds in the market, a return to "quantitative easing" worth around 1,000 million pounds, managed to calm the market. Thus, Bond yields fell significantly by more than 50 basis points in the 10-year GILT bond.
The pound also recovered some of its lost ground, rising above 1.0800 against the dollar after briefly falling below 1.0300 in a market panic. It remains to be seen how this situation will affect the Bank of England's next interest rate decision. The most recent forecasts called for a 100-bps increase, but given the circumstances, they will most likely take a more cautious approach.
The United Kingdom carries a certain amount of importance in the global economy, and disruption in such a country contaminated the rest of the markets. Furthermore, the recovery of British bonds and the pound has generally benefited markets.
The Wall Street indices rose significantly yesterday as risk sentiment improved, and the 10-year US bond was bought again by investors, lowering its yield by around 24 basis points, an extraordinary and unusual market movement.
This decline in bond yields has benefited American stock markets, and there are growing calls for the Federal Reserve to reverse its excessively harsh monetary policy, which is endangering the economy. Stanley Druckenmiller, a prestigious and legendary investor, is among those who believe the Fed's actions are incorrect. The next few days will be crucial in this regard, with the release of the Federal Reserve's preferred inflation indicator personal consumption expenditure, which could change the US central bank's mind if it shows a pullback.