Finanze® Daily Digest - 27/10/2022

The Brief: The market was upbeat yesterday upon Rishi Sunak’s confirmation as the country’s newest PM. According to The Financial Times, the 30-year gilt yield fell to 3.67%, while the 10-year gilt followed suit at 3.64%, closer to its pre-mini-Budget level of 3.50%.

Why It Matters: Truss’ unfunded tax cuts and Kwarteng’s long delayed economic report were the primary reasons why the gilt market experienced a severe rout. News of gilt yields returning to lower levels is a respite from weeks of devastating financial news.

Finanze® Foresights: Yesterday’s market reaction was quite different during Truss’ election win when the FTSE was down 0.7% and sterling traded -0.14% at $1.1503 against the dollar. But the market sentiment today is quite expected since investors have long waited for a change of leadership — and Sunak may just be the fresh start that they need. But not everyone will be comfortable with Sunak’s next decisions moving forward. Today, Lloyds Banking Group reported a dip in its pre-tax profits to £1.5 billion, lower by £500 million from the previous year, owing to bad loans. This may just be the beginning of a tougher year for the banking industry as Sunak is most likely to impose additional taxes on bank profit surcharge and a potential fall in asset prices in the coming months. Furthermore, asset quality will still be affected as borrowers, especially mortgage holders, are still being squeezed by the cost-of-living crisis, which forces them to be at risk for defaults.

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