British Government U-Turns On Tax Cuts; Markets Unconvinced

Prime Minister Liz Truss of the United Kingdom made a significant reorganization and abandoned a crucial tax-cutting vow on Friday, but these actions were unable to calm the markets as the pound and government bonds continued to decline.

Truss reversed course on her contentious “mini-budget,” which has caused markets to tremble since it was unveiled on September 23, at a hastily scheduled news conference. This was the second retreat on her decision to postpone a planned hike in U.K. company tax.

Kwasi Kwarteng became the second-shortest-serving chancellor in history after Truss fired him and replaced him with Jeremy Hunt just hours before Friday’s announcement.

Before Truss’ news conference, gilts, or UK government bonds, saw a strong rally. During morning trade, the long-term 30-year yield temporarily reached 4.261%. Prices and yields follow opposite trends.

However, after the conference, they handed back their gains, with the 30-year yield reverting to roughly 4.819% by around 5 p.m. U.K. time.

Following Truss’ statement, sterling saw a tumultuous session and dropped by about 1.1% versus the dollar, trading at about $1.1205 at the time.

It appears that Truss’s speech failed to persuade experts or the markets that Britain’s financial storm is over.

According to Mike Owens, a U.K. sales trader at Saxo, Truss’s U-turn on tax policies may make investors wary of upcoming political instability rather than clearing the air.

ā€œThis historic U-turn could bring some joy to the market, though act as a warning and increase uncertainty over further short-term change of hearts, which will continue to see the economy travel down Liz Truss’ political helter skelter,ā€ Owens said in an analysis note.

The announcements Friday may have come too late, suggested Ben Laidler from investment company eToro. ā€œThere is a feeling that the horse may have bolted,ā€ Laidler said in a note released just before Truss’s statement.

ā€œThe costs of the mini-budget horror show have already been high and it’s not clear that the expected corporation tax U-turn will sustainably calm markets,ā€ he said.

This article was originally published here.

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