Truss implosion shows big change in financial climate HEAD TOPICS

Truss implosion shows big change in financial climate

10/21/2022 5:53:00 AM

British prime minister s resignation after 45 days underscores how anti-inflation fight is remaking markets

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The Washington Post

The astonishing political demise of British Prime Minister Liz Truss, just after 44 days, shows what can happen when ambitious plans collide with a new financial market reality that places the fight against inflation above all else. British prime minister s resignation after 45 days underscores how anti-inflation fight is remaking markets The markets’ grinding gears do not meanAdvertisementUnpredictable linkages between finance and geopolitics have flared in earlier eras, such as in 1998 when the hedge fund Long-Term Capital Management collapsed during the Russian financial crisis, requiring a U.S. government-led bailout. For more than a decade, while interest rates were low and the Fed actively purchased government and mortgage securities, it was easy for investors to sell most assets.“Liquidity has been papering over weaknesses in other markets, and now we’ll see what they are. And we’ll see it in a bunch of assets,” said Megan Greene, global chief economist for the Kroll Institute. Read more:
The Washington Post » UK Prime Minister Liz Truss resigns after Conservative turmoil obliterates her authority UK Prime Minister Liz Truss resigns after failed budget and market turmoil With resignation, Liz Truss will be shortest-serving U.K. prime minister ever Wreckage from O'Rourke's failed presidential campaign could cost him the Texas governor's race

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With the electric vehicle market heating up, CNN's Peter Valdes-Dapena joins 'Nightcap's' Jon Sarlin to talk how Elon Musk can keep Tesla at the top. Plus, The New York Times' Lauren Hirsch on how the proposed Kroger-Albertsons could affect your grocery bill. And does Kanye West know what he's getting with his proposed purchase of Parler? The Verge's Makena Kelly on Ye's Parler trick. To get the day's business headlines sent directly to your inbox, sign up for the Nightcap newsletter. Read more >> Let’s do Joe next UK Prime Minister Liz Truss resigns after Conservative turmoil obliterates her authorityBritish Prime Minister Liz Truss resigned Thursday, bowing to the inevitable after a 45-day term in which her policies triggered turmoil in financial markets and a rebellion in her Conservative Party. How many Scaramuccis? The results are courtesy of Brexit and it’s disastrous outfall. I’m surprised she lasted 4.1 Scaramuccis. Boris Wildhair had the minor benefit of “let’s see what happens”. Now we know. UK Prime Minister Liz Truss resigns after failed budget and market turmoilU.K. Prime Minister Liz Truss resigned following a failed tax-cutting budget that rocked financial markets and which led to a revolt within her own Conservative Party. Well, she didn’t last long haha When people truly open their eyes to conservatism, then none of them should! Guess they didn't Truss her Seems minor compared to what Biden has done. With resignation, Liz Truss will be shortest-serving U.K. prime minister everPrime Minister Liz Truss will become the shortest-ever serving prime minister, after the financial market volatility resulting from her mini-budget proposals... 44 days = 4.4 Scaramuccis I had a feeling that Jonhson would come back. If elected officials keep accepting the media narrative for the government - the journalists will keep trying to achieve sensational dailies by making up facts and trying to pressure leadership failures. Wreckage from O'Rourke's failed presidential campaign could cost him the Texas governor's raceWreckage from Beto O'Rourke's failed presidential campaign could cost him the Texas governor's race No. You’re wrong about that. Abbott’s gross incompetence, failure to protect the public from Covid, inaction on gun violence, malfeasance during the storm are all positives. Got it. Young People Don't Want to Work (at Oil Companies)Who wants to work for the brands that brought you climate change? the global economy in a quarter-century.1 hour ago Britain's Prime Minister Liz Truss addresses the media in Downing Street in London, Thursday, Oct.WATCH LIVE Key Points On Sept.Prime Minister Liz Truss will become the shortest-ever serving prime minister, after the financial market volatility resulting from her mini-budget proposals led to a revolt by members of her own political party. Bond market volatility this month hit its highest level since early March 2020, when the Fed was forced to step in to buy $1 trillion in U.S. Truss says she resigns as leader of UK Conservative Party. treasury securities. bond markets which balked at the debt-funded tax cuts he put forward. Sluggish trading in treasuries — normally the most liquid market on Earth — now has Treasury Secretary Janet L. Making a hastily scheduled statement outside her 10 Downing Street office, Truss acknowledged that “I cannot deliver the mandate on which I was elected by the Conservative Party. Yellen considering buying back some government securities from traders to ease market functioning. The duration in office did exceed that of former U. The markets’ grinding gears do not mean an imminent financial crisis , analysts said. Truss, who said she will remain in office for a few more days while that process unfolds, has been prime minister for just 45 days. Leon Neal Getty Images LONDON — U. But the friction illustrates the bumpy transition that the global economy is making from more than a decade of ultralow interest rates to an era of more costly credit. With the Fed promising months of additional interest rate hikes, more market volatility is likely.” But Truss couldn’t hold on any longer after a senior minister quit her government with a barrage of criticism and a vote in the House of Commons descended into chaos and acrimony just days after she was forced to abandon many of her economic policies. Advertisement Globally, stocks have lost roughly $30 trillion in value so far this year while bonds have suffered one of their worst years ever. Truss said in a statement outside Downing Street: "We set out a vision for a low-tax, high-growth economy that would take advantage of Brexit. The financial reset is occurring as international risks are multiplying, with the war in Ukraine and the souring of U. When it was unveiled by the government last month, the plan triggered financial turmoil and a political crisis that has seen the replacement of Truss’ Treasury chief, multiple policy U-turns and a breakdown of discipline in the governing Conservative Party.K. S.-China relations roiling markets. “Nobody has a route plan." Her resignation follows a meeting with Graham Brady, the Conservative politician that is in charge of leadership votes and reshuffles. Unpredictable linkages between finance and geopolitics have flared in earlier eras, such as in 1998 when the hedge fund Long-Term Capital Management collapsed during the Russian financial crisis, requiring a U.S. ADVERTISEMENT Truss quit after a meeting with Graham Brady, a senior Conservative lawmaker who oversees leadership challenges. government-led bailout. During the hour the meeting lasted, the number of MPs publicly calling for Truss to step down reached 17.868% falling 12 basis points to 3. “There is a risk of a disorderly tightening of financial conditions that may be amplified by vulnerabilities built over the years,” the International Monetary Fund warned this month in a report, which said financial stability risks had grown since April and are “significantly skewed to the downside. “It’s time for the prime minister to go,” Conservative lawmaker Miriam Cates said earlier Thursday.” Advertisement For more than a decade, while interest rates were low and the Fed actively purchased government and mortgage securities, it was easy for investors to sell most assets. Now as the Fed and other central banks tighten monetary policy, normally liquid markets are becoming more congested.” Legislator Ruth Edwards said “it is not responsible for the party to allow her to remain in power. Opposition parties Labour, the Scottish National Party and the Liberal Democrats called for an immediate general election on Thursday afternoon. Investors who want to unload, say, a Treasury bond, encounter delays or wide gaps between their asking price and what buyers will pay. Since securities backed by the U. With Conservatives holding a large parliamentary majority, an opposition call for a fracking ban was easily defeated. “Our country has been held back for too long by low economic growth. S. government are regarded as risk-free, their price is the key to determining the value of other financial assets. Chris Bryant, a lawmaker from the opposition Labour Party, said he “saw members being physically manhandled . So problems buying and selling treasuries can infect other markets. “Liquidity has been papering over weaknesses in other markets, and now we’ll see what they are.. And we’ll see it in a bunch of assets,” said Megan Greene, global chief economist for the Kroll Institute. Truss’s predecessor former prime minister Boris Johnson served for over three years, and led the country through the Covid-19 pandemic and a host of scandals including Partygate. Biden's American Rescue Plan made inflation worse, but the economy better In the United Kingdom, while Truss took a beating for delivering a risky economic plan that had not been vetted by independent analysts, British pension funds became the center of the crisis.” Conservative officials denied there was manhandling. Many fund managers had banked on a strategy called liability-driven investing, or LDI, designed to allow pensions to earn higher returns during the low-rate era that followed the 2007-2008 financial crisis. With LDI, fund managers basically would lend bonds in return for cash that they would reinvest to boost returns. Hours later, Truss’ office said both remained in their jobs. Advertisement When yields spiked on British government bonds, the funds were forced to quickly raise cash to make up the difference between the original value of the bonds they had pledged and their current lower price. The fastest way to raise money was to sell government bonds. An editorial in the Daily Mail was headlined: “The wheels have come off the Tory clown car. It ended with his resignation in 1741 after a poor general election result. But that set off a vicious cycle: Falling bond prices meant demands for more collateral, which required more bond sales, pushing prices down even more. “These are the sort of things we saw in the financial crisis, and that’s something to be worried about,” John Waldron, president and chief operating officer of Goldman Sachs, told an industry group this month.” But she was unable to guarantee Truss would lead the party into the next election. “We don’t know what the next risk is that will move the market.” Indeed, fresh trouble elsewhere could ricochet from market to market. With opinion polls giving the Labour Party a large and growing lead, the Conservative Party decided its only hope of avoiding electoral oblivion was to replace Truss. For example, corporations with weak credit ratings could be downgraded to junk status, which would force some portfolio managers to sell their bonds, Greene said. He governed Mexico for all of one hour in February 1913 when he legally succeeded President Francisco Ignacio Maderno after he was assassinated in a coup along with his vice president Jose Maria Pino Suarez. Advertisement As those corporate bonds sink in value, other investors who bought them with borrowed money might face sudden demands for repayment. The party is keen to avoid another divisive leadership contest like the race a few months ago that saw Truss defeat ex-Treasury chief Rishi Sunak. To raise money to meet those “margin calls,” they would sell other assets, triggering a price decline there, too. Corporations that are poor credit risks already are finding it harder to raise money in the bond market. Whoever it is will be the country’s third prime minister this year alone. Issuance of new high-yield, or “junk,” bonds so far this year is down three-quarters from the same period last year, according to the Securities Industry and Financial Market Association (SIFMA.) But only 19 percent of the corporate debt that must be refinanced by the end of next year is junk, according to Torsten Slok, chief economist of Apollo Global Management. Truss’ downfall was hastened by the resignation on Wednesday of Home Secretary Suella Braverman. “The Tories cannot respond to their latest shambles by yet again simply clicking their fingers and shuffling the people at the top without the consent of the British people,” he said. “The amount to be refinanced is quite manageable. The question is: How long do interest rates stay at high levels?” Slok said. She used her resignation letter to lambaste Truss, saying she had “concerns about the direction of this government. Advertisement If rates stay high, companies and governments alike would feel a serious pinch. During previous episodes of market turmoil, the Fed often intervened to effectively stanch the bleeding. Braverman was replaced as home secretary, the minister responsible for immigration and law and order, by former Cabinet minister Grant Shapps, a high-profile supporter of her defeated rival Sunak. In March 2020, as stock prices collapsed and trading in treasury securities seized up, the Fed cut its benchmark lending rate to near zero and added more than $4 trillion in securities to its balance sheet. But with inflation now stubbornly high, the Fed will probably be unable or unwilling to cut rates or flood markets with cash, analysts said. 23 spooked financial markets and triggered an economic and political crisis. “We’re in an unparalleled hiking cycle globally. … I’m more nervous about the system breaking because the Fed backstop is just not there,” said Priya Misra, head of global rates strategy for TD Securities.K. In the wake of the U.K. The Bank of England was forced to intervene to prevent the crisis from spreading to the wider economy and putting pension funds at risk. debacle, higher interest rates are already shadowing government finances. Heavily indebted countries like Italy, despite rising energy costs, may have to reduce their borrowing plans. He said the government will need to save billions of pounds and there are “many difficult decisions” to be made before he sets out a medium-term fiscal plan on Oct. Already, 19 developing countries must pay 10 percentage points above the roughly 4 percent that the U.S. Speaking to lawmakers for the first time since the U-turn, Truss apologized Wednesday and admitted she had made mistakes during her six weeks in office, but insisted that by changing course she had “taken responsibility and made the right decisions in the interest of the country’s economic stability. government now pays investors to borrow for 10 years, according to the U. N. But Truss said she would not. Development Program. Government bond markets may have become more vulnerable to shocks over the past decade, according to a new report from the Financial Stability Board, a global advisory panel.” He said that amid a worsening a cost-of-living crisis, “Britain cannot afford the chaos of the Conservatives anymore. Advertisement Trading in the U.S.”. treasury market is less liquid than at any time since April 2020, according to one Bloomberg gauge. The market jam is the result of the sharp increase in the volume of government debt securities coupled with the impact of post-financial crisis regulations, intended to make banks safer, but which also have made banks less willing to store treasuries on their own books while they look for a buyer. The $23.7 trillion in treasuries outstanding is up more than $7 trillion since the end of 2019, according to the SIFMA, reflecting the cost of fighting the pandemic and supporting the economy. At the same time, regulations enacted after the financial crisis require banks to hold more capital in reserve to cover potential losses on securities they own. The Fed also has stopped reinvesting the funds it receives from maturing securities, which some investors say has hurt demand for treasuries. Treasury this month surveyed traders on whether they supported a potential program for the government to repurchase some securities and, if so, how it should be structured. “We are worried about a loss of adequate liquidity in the market,” Yellen said this month. .