UK tax rollback sends equities and pound rebounding

  • Britain abandons small part of tax plan; relieved markets
  • The Reserve Bank of Australia surprises with a short hike
  • high VIX; Credit Suisse shares slide to nerves below

SYDNEY, Oct 4 (Reuters) – Asian stocks rebounded on Tuesday after Britain scrapped elements of a controversial tax cut plan, temporarily improving global market sentiment and rallying bonds and the pound.

Australia’s central bank added to that sense of relief in markets, surprising investors by raising interest rates 25 basis points less than expected, saying they had already risen significantly. .

This pushed the Aussie dollar lower, sending the S&P/ASX 200 Index (.AXJO) up 3.6% and boosting benchmark 3-year bonds to their best day in 13 years.

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In holiday-thinned trade in China and Hong Kong, MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) rose 1.7%, driven by gains in Australia.

UK stocks looked set for a rebound, with FTSE futures up 0.8%.

“It looks like in the short term it’s a bit oversold,” said Geoff Wilson, chief investment officer at Wilson Asset Management in Sydney.

“Is it the bottom? It’s almost impossible to pick the bottom, but I don’t think so,” he said, referring extensively to the markets.

The Japanese Nikkei (.N225) rose 2.8%. The pound hit a near two-week high of $1.1343, representing a rebound of almost 10% from a record low last week after plans for unfunded tax cuts were triggered chaos over UK assets.

“The about-face… won’t have a huge impact on the overall UK fiscal position in our view,” said John Briggs, head of economics and market strategy at NatWest Markets.

“(But) investors took it as a signal that the UK government could and is at least partially willing to reverse its intentions which have so disrupted markets over the past week.”

Investors also welcomed stability on the long end of the gilt market, although emergency buying from the Bank of England was only relatively modest.

S&P 500 Futures Contracts rose 1%, following a 2.6% rebound for the index (.SPX) overnight.

UK Finance Minister Kwasi Kwarteng issued a statement reversing planned tax cuts for high earners. It is just £2bn of the £45bn in unfunded tax cuts that sent the gilt market crashing last week.

South Korea’s Kospi (.KS11) rebounded 2.5%, moving away from last week’s two-year low, despite North Korea’s missile firing over Japan for the first time in five years .

STERLING REBOUND

The rally in the pound has eased some nerves in the forex market, although the persistent strength of the dollar is still keeping many major currencies close to their lows and authorities across Asia are on edge.

The Japanese yen hit 145 to the dollar on Monday – a level that prompted official intervention last week – and was last at 144.71. The euro was at $0.9838, around three cents higher than last week’s 20-year low.

Chinese authorities have rolled out maneuvers to support the yuan, ranging from unusually strong market signals to administrative measures that increase the cost of selling it short.

“Greater volatility is almost certainly assured as currency markets refocus on recession risks in the United States, which continue to develop,” said ANZ senior economist Miles Workman, the data on the US employment on Friday being the next major data point on the horizon.

The Australian dollar fell to $0.6451 after the central bank meeting. The Reserve Bank of New Zealand meets on Wednesday and the kiwi held just above $0.57.

Treasuries rallied against gilts overnight and the benchmark 10-year yield fell 15 basis points. It remained stable in Asia at 3.62%, after briefly exceeding 4% last week.

Other indicators of market stress abound. The CBOE Volatility Index (.VIX) remains elevated and above 30. Credit Suisse shares (CSGN.S) and bonds hit record highs on Monday as concerns over the bank’s restructuring plans swept away the steps.

Oil held on to overnight gains on news of possible production cuts, and Brent futures rose 43 cents for the last time at $89.29 a barrel.

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Editing by Sam Holmes

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