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UK market swings provide 'greatest profit opportunities since the 1970s' say traders

Stock Markets Sep 29, 2022 12:41
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© Reuters. UK market swings provide 'greatest profit opportunities since the 1970s' say traders
 
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Currency and bond traders said they were enjoying the opportunity of a lifetime in UK assets following the turmoil sparked by the government's 'mini budget', with gilts rebounding further on Thursday but shares in life insurers tanked further.

In the days following chancellor Kwasi Kwarteng's fiscal announcement the pound accelerated a decline against the dollar that had begun at the start of the year, with a similar sell-off in gilts also surging, sending gilt yields soaring, before the Bank of England intervened on Wednesday.

Both sterling and gilt yields rebounded after the intervention, where the central bank said it would immediately start buying billions of pounds worth of UK bonds and continue in the coming weeks to stabilise markets.

UK assets remain "firmly in focus" today, said analyst Fawad Razaqzada at City Index, adding that "traders are using price action on the FTSE, pound and – more to the point – gilts as a guide when speculating on the wider financial markets."

He said bearish speculators have eased off the gas a little, providing some relief for the pound and gilts, though the FTSE 100 has given back nearly all the gains made after the BoE stepped in.

Currency trader John Floyd told Reuters that he was seeing "some of the greatest profit opportunities in the currency space since the end of Bretton Woods in the early 1970s", which had been created for him and his peers by the conflicting UK government policy to increase borrowing while the central bank was intent on raising rates and had only last week said it wanted to sell down its gilt holdings.

The trader said his firm was long the dollar and short the pound, with the belief that the BoE intervention will shake confidence in the pound and "encourage people to look for further weakness."

He said the BoE stepping in to the gilt market to lower rates "will make it that much more challenging to fund the external deficit and a weaker currency will be the equilibrating mechanism."

Another trader told the newswire: "It's never too late to be short sterling", while notorious hedge fund manager Crispin Odey told the FT his bet against UK government bonds was “the gifts that keep on giving”, while also predicting the pound could reach parity against the dollar.

UK 10-year gilt yields rose to 4.202% on Thursday morning, having dropped to a low of 3.948% the day before, while the 30-year gilt hit 4.126%, after shooting up from 3.60% to almost 5.10% on Wednesday morning before dropping to 3.867% following the BoE move.

Moves in the UK sovereign bond market were "messed up" said rates strategist Richard McGuire at Rabobank, who described the "incredibly dramatic moves" on the gilt curve, with the 30yr yield falling by a "barely believable" 106 basis points.

The rise in long-dated gilt yields had threatened UK financial stability by forcing pension funds to sell assets to meet cash collateral requirements.

McGuire said "the reality is that the BoE has applied a temporary sticking plaster to a fiscal credibility issue that has been created by the UK’s government".

He predicted the market "will keep pushing the BoE to make greater and greater intervention – but the problem will not be solved without a change in the message on the fiscal side".

Life insurers Legal & General Group PLC (LON:LGEN), Phoenix Group PLC and Aviva PLC (LON:AV.) slid as investors worried about their investment exposure to gilts, and over five days the trio are down 15%, 13% and 11.5% respectively.

Insurance analysts at UBS noted that the share price reaction was driven by the news about UK pension scheme margin calls on their liability driven investments but "whilst life insurers also use similar techniques to manage market risks, we see margin calls and liquidity impacts as relatively more manageable" for the companies they cover.

Banks also continued in the red, with Lloyds Banking Group PLC (LON:LLOY), NatWest Group PLC (LON:NWG) and Barclays PLC (LON:BARC) down 12%, 11% and 10.5% over five sessions.

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UK market swings provide 'greatest profit opportunities since the 1970s' say traders
 

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Comments (3)
John Williams
John Williams Sep 29, 2022 17:49
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Not impressed by Truss, but she’s only there for 18 months. Grab the cheap dividend stocks - Admiral, L&G, Persimmon, JUP, LIO, ITV!! Amazing sale!!
Daniel Holdbrook
Daniel Holdbrook Sep 29, 2022 16:36
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led by donkeys
Cosmin Ciobanu
Cosmin Ciobanu Sep 29, 2022 13:36
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Fiscal and financial armagedon :) well done UK !!!
 
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