The FTSE 100 experienced a whipsawing session on Thursday as a rally sparked by hopes the UK government would U-turn on some of their radical tax cuts was stopped in its tracks by higher than expected US inflation data.
The FTSE 100 sank more than 120 points in minutes after US CPI inflation came in at 8.2% versus expectations of 8.1%. However, the month-on-month 0.6% jump in prices was the major concern for markets.
London’s leading index had staged a strong rally earlier in the session after reports the UK government could be set to U-turn on radical tax cuts that sent a shock waves through markets in September.
U-turn reports – although not officially confirmed and lacking details – are likely the result of mounting pressure on the Prime Minister and Chancellor. There have been calls for them to resign from their own party’s MPs and her administration is persistently lambasted in the media.
Liz Truss had been further humiliated yesterday by a recording of her meeting with the King. King Charles appeared to respond ‘oh dear’ to her arrival at their weekly meeting.
A scene straight from the Office.
— Dr. Jennifer Cassidy (@OxfordDiplomat) October 12, 2022
Truss: “Your Majesty… Lovely to see you again.”
King: “Back again. Dear oh dear. Anyway…”
Political awkwardness and unintentional comedy at its finest.
pic.twitter.com/o5G7Tsz3IA
The King aptly summed up the markets, and many UK voters, perception of Liz Truss’s tenure as Prime Minister and a U-turn could be a political move to save her job.
A U-turn on some elements of the mini-budget could trigger a sustained rally in UK assets including the pound and UK equities.
Nonetheless, the reports of a potential U-turn could not contend with US inflation data news and the FTSE 100 was firmly in the red at the time of writing, down 1.3% at 6,734.
US inflation at 8.2% means the Federal Reserve will likely push on with rate hikes in the order 75-100 bps in November and are a long way off pivoting to an easing on policy.
UK banks
A look at the intraday chart of UK banks highlights the volatile nature of the session. Lloyds and Barclays had been up over 6% before the inflation data but sank with the wider market. A roll back of tax cuts by the UK government would boost market confidence in UK assets and help the mortgage market.
However, it was the FTSE 100’s overseas earners that drove sharp declines in the FTSE 100 as the dollar soared.
The cyclical sectors such as miners were the most heavily hit on concerns ongoing adjustments to interest rate hikes would hurt the global economy.