I have rarely seen sentiment so bad: ‘we’re doomed, doomed!’ seems to be the prevailing mood across the markets. The good news is that this is the kind of thing we need to get to the moment of capitulation when everyone throws in the towel and the market bottoms. The bad news is what happens until then and what damage is done to markets and people’s finances in the process. UK bond markets are a case in point – and no one is terribly sure what happens next; fiscal policy and monetary policy are both incredibly uncertain. The salve administered by the Bank of England yesterday is already wearing off – 30yr gilt yields jumped this morning. Markets like to test the limits. You can’t fight the Fed and you can’t fight the tape: the BoE and HMT are no different to anyone else.
The Bank of England shouted ‘don’t panic!’ as it weighed in with a £65bn stimulus package to shore up the gilt market. It soothed market angst and keeps the wheels moving, but it does not solve the underlying problem. The Bank moved to stop contagion, but stress remains and it remains the case that it must tighten policy faster to offset the effects of the Budget – gilt yields are not back to pre-Budget levels and the path of least resistance without further intervention is up. It amounts to a split personality – easing on end, tightening on the other. The Bank says it’s temporary, but we cannot know for sure when market confidence will return and whether the Bank will be called upon to do more, further taking it away from its inflation-busting, rate-hiking agenda.
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