By Geoffrey Smith
Investing.com -- The pound hit an all-time low and the rout in U.K. bonds worsened after the new government indicated that it isn't yet done with unfunded tax cuts and energy subsidies. Italy is going to get a right-wing government after a bloc led by Giorgia Meloni's Brothers of Italy party emerged as the winner of national elections. Stocks are set to open lower, with a special spotlight on Amazon and Berkshire Hathaway after the weekend publication of a study on the impact of the new global minimum corporate income tax. Russia's referendums-at-gunpoint in Ukraine are shunned by its neighbors and allies, while its stock market plunges. And crude oil is lower on the prospect of demand destruction as the world economy slows. Here's what you need to know in financial markets on Monday, 26th September.
1. Sterling, Gilts routed
The pound hit an all-time low against the dollar and slumped against the euro and other currencies, while government bond yields rocketed higher, in a shattering verdict on the new government’s tax cuts and energy subsidy plans.
The pound fell as low as $1.0384 before recovering on speculation that the Bank of England may carry out an emergency rate hike, only days after saying it would wait until November before reacting to the government's moves.
The move sent shockwaves through global bond markets, on concerns that other advanced economies may abandon economic orthodoxy as they struggle with the consequences of this year's surge in energy prices.
The effects of that crisis were also on show in another shockingly bad German business confidence number from Ifo.
2. Meloni set to form new Italian government
A right-wing coalition under Giorgia Meloni's Brothers of Italy party appears to have won national elections, securing enough seats for majorities in both chambers of parliament.
Italian bonds reacted with a modest selloff, the key 'spread' between the Italian and German 10-year yield widening by only 4 basis points, while the FTSE MIB was the only European stock index to eke out a gain on a morning overshadowed by developments in the U.K.
Concerns at the Brothers of Italy's roots in the country's fascist past have been mitigated – at least in markets – by Meloni's pledge to pursue a responsible fiscal policy, unlocking tens of billions of euros of post-pandemic aid from the EU budget. Meloni has also indicated broad support for the U.S. and EU reaction to Russia’s invasion of Ukraine.
There was a strong protest element to the results, nonetheless: turnout was the lowest ever recorded, while parties that had supported the broad coalition government of Mario Draghi fared particularly badly.
3. Stocks set to open lower; Amazon, Berkshire in focus
U.S. stock markets are set to open at their lowest in nearly two years later, as the wave of risk aversion generated by last week’s Federal Reserve meeting continues to run its course.
By 06:20 ET (10:20 GMT), Dow Jones futures were down 202 points, or 0.7%, while S&P 500 futures were down by a similar amount, and Nasdaq 100 futures were down by a slightly smaller 0.4%, amid concerns that the dollar's strength will eat into the profits and outlooks of multinational companies in the upcoming earnings season.
Over the weekend, a new study showed that the new global minimum tax on corporate profits may hit Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRKa), and eBay (NASDAQ:EBAY) hardest. Those stocks may garner some attention in the absence of any scheduled corporate news. In Europe, Unilever (NYSE:UL) signaled CEO Alan Jope will step down next year.
4. Russian unrest spreads, stocks tumble on mobilization fears
Russia's efforts to shore up its faltering campaign in Ukraine suffered a series of blows over the weekend, with protests across an expanded draft of reservists continuing and a wave of international condemnation of the referendums held at gunpoint in Russian-occupied areas of Ukraine.
Serbia, one of Russia's closest and oldest allies, said it would not recognize the referendum results, as did Turkey and Kazakhstan, two other key players in the region.
Additionally, Russian media reported the firebombing of several draft centers, while one military commissioner was shot and critically injured while processing the mobilization of reservists in Ust-Ilimsk, near Lake Baikal.
Kremlin spokesman Dmitry Peskov denied suggestions that the country has taken measures to ban emigration by fighting-age males. Russia’s benchmark stock index fell 10%, meanwhile.
5. Oil stumbles on fears of demand destruction
Crude oil prices fell to a new nine-month low as the shake-out in bond and currency markets cast further doubt over the strength of the global economy and global oil demand.
By 06:30 ET, U.S. crude futures were down 0.4% at $78.44 a barrel, while Brent was down 0.5% at $84.63 a barrel.
Sentiment was hardly helped by signs of further economic stress in China, the world’s largest importer, where the central bank tweaked its reserve requirements to cushion the fall of the yuan, while China Commercial Bank unveiled a new fund to prop up ailing real estate projects.