# Britain’s market rout stokes contagion fears around the globe
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-09-28
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Global Markets Jolted by British Asset Sell-Off Chaos
Meta Description: UK economic instability sends shockwaves through global markets with rapid sell-offs in bonds and currency, creating volatility and uncertainty.
URL: https://financedigest.com/britains-market-rout-stokes-contagion-fears-around-the-globehtml

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By Davide Barbuscia, Marc Jones and Dhara Ranasinghe

NEW YORK/LONDON (Reuters) – The scale and speed of the sell-off in British assets has jolted world markets, raising concern about contagion as chaos in a major developed economy adds to unease already generated by sharp interest rate rises from the United States and elsewhere.

Following Friday’s UK mini-budget, which flagged 45 billion pounds’ ($48 billion) worth of unfunded tax cuts, sterling tumbled to record lows while British bond prices slid. Signs of dislocation were apparent on Wednesday before the [Bank of England](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout") (BoE) stepped in to calm markets.

Markets had already been unnerved by an energy shock that has fuelled [inflation and a strong dollar](https://www.financedigest.com/stocks-and-gold-cheer-u-s-inflation-picture-while-dollar-slides.html "Stocks and gold cheer U.S. inflation picture, while dollar slides") that is creating headwinds globally and which prompted a rare Bank of Japan intervention in currency markets just last week.

It is like having a sand castle where bits and pieces start falling off all together,” Olivier Marciot, [head of investments](https://www.financedigest.com/hsbc-appoints-new-markets-head-amid-wider-investment-bank-reshuffle.html "HSBC appoints new markets head amid wider investment bank reshuffle") for multi assets and wealth management at Unigestion, said, referring to Britain contributing to global stress. “I think the UK is one of those pieces … It is just adding to the pain, adding to the stress.”

Graphic: Major currencies vs. the U.S. dollar https://graphics.reuters.com/GLOBAL-FOREX/dwpkrodkevm/chart.png

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/09/207.jpg)

Concern about the UK’s new economic policy has added to the already heightened volatility, with a rout in gilts spilling over into even safe-haven U.S. Treasuries and top-rated German bonds.

Clearly, global angst is [rising about the spillover from Britain](https://www.financedigest.com/influence-of-the-rise-of-machinery-on-britains-workforce.html "INFLUENCE OF THE RISE OF MACHINERY ON BRITAIN’S WORKFORCE"). Atlanta Fed President Raphael Bostic on Monday warned events in the United Kingdom could lead to greater economic stress in Europe and the United States, while the [International Monetary Fund on Tuesday took aim at new British financial](https://www.financedigest.com/the-hidden-financial-woes-of-international-students-heading-for-the-uk.html "The Hidden Financial Woes of International Students Heading for the UK") plans. U.S. Treasury Secretary Janet Yellen said on Tuesday the United States was monitoring developments in Britain, the Financial [Times](https://www.financedigest.com/now-is-the-time-for-finance-leaders-to-take-on-a-more-strategic-and-valuable-role.html "Now is the time for finance leaders to take on a more strategic and valuable role") reported.

“There will be impacts, there’s correlations … some [market volatility](https://www.financedigest.com/italys-a2a-trims-green-investment-plan-citing-economy-volatile-markets.html "Italy’s A2A trims green investment plan citing economy, volatile markets"), and then how it weighs in the global growth picture,” said Paul Malloy, head of municipals at Vanguard. “The U.S. is a broadly insulated economy … we’re a lot more insulated from a lot of global pressures, but with that said, we’re not completely immune from what happens in Europe, China and the UK.”

PIMCO’s [chief investment officer](https://www.financedigest.com/iris-software-group-names-matt-tuson-as-chief-revenue-officer.html "IRIS Software Group names Matt Tuson as Chief Revenue Officer"), Dan Ivascyn, said that although he believed developments in the UK did not represent significant systemic risks, they did add to volatility in already volatile markets.

As [Britain’s gilt yields soared](https://www.financedigest.com/britain-delays-major-rail-project-hs2-as-costs-soar-again.html "Britain delays major rail project HS2 as costs soar again") 100 basis points over the course of two days to multi-year highs, U.S. 10-year [Treasury yields and German Bunds were dragged higher](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom") too.

The ICE BofA Move Index, a measure of volatility in the U.S. fixed [income market](https://www.financedigest.com/robinhood-coinbase-find-sanctuary-in-interest-income-amid-market-rout.html "Robinhood, Coinbase find sanctuary in interest income amid market rout"), has also jumped to its highest level since March 2020.

The wild [swings in the pound have ricocheted across currency markets](https://www.financedigest.com/eus-planned-reforms-aim-to-better-protect-power-bills-from-market-swings.html "EU’s planned reforms aim to better protect power bills from market swings"), where volatility was already climbing. According to the widely watched Deutsche Bank Currency Volatility Index, volatility across currencies on Wednesday [hit its highest level since the March 2020 COVID-19- induced market](https://www.financedigest.com/tech-earnings-hit-pause-button-on-market-rally.html "Tech earnings hit pause button on market rally") meltdown, jumping more than 20% from levels last week.

The BoE’s announcement on Wednesday that it would [buy as many long-dated government bonds as needed](https://www.financedigest.com/weighing-up-buy-now-pay-later-what-you-need-to-know-before-you-invest.html "Weighing up Buy Now, Pay Later: What you need to know before you invest") between now and Oct. 14 to stabilise markets brought some calm.

Not all investors thought it was the best approach, however, with Stanley Druckenmiller of Duquesne Family Office [saying the bond buying](https://www.financedigest.com/sega-sammy-says-it-is-considering-buying-angry-birds-maker-rovio.html "Sega Sammy says it is considering buying Angry Birds maker Rovio") was not appropriate in the inflationary environment.

[Closely followed indicators of financial](https://www.financedigest.com/fast-track-financial-close.html "FAST-TRACK FINANCIAL CLOSE") stress remain contained. Borrowing costs for U.S. dollars in currency derivatives markets have risen sharply this week but remain well below levels hit after Russia’s invasion of Ukraine in February and the COVID-19 [market rout](https://www.financedigest.com/global-bank-bonds-claw-back-losses-as-markets-rout-eases.html "Global bank bonds claw back losses as markets rout eases") in March 2020.

U.S. [stock market](https://www.financedigest.com/compelling-tips-to-make-profitable-investments-in-the-stock-market.html "Compelling Tips to Make Profitable Investments in the Stock Market") volatility as measured by the “fear index,” the VIX, has also climbed in recent days but remains below its 2022 highs.

But the risk of contagion remains given the backdrop of global uncertainty and the higher global [interest rates](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies").

Markets are selling off, [central banks](https://www.financedigest.com/no-santa-rally-for-markets-as-central-banks-dampen-peak-rate-hopes.html "No Santa rally for markets as central banks dampen peak rate hopes") are very hawkish … and that sense of confusion means moves have a tendency to self-feed,” said Charles Diebel, head of fixed income strategy at Mediolanum [Asset Management](https://www.financedigest.com/britains-post-brexit-asset-management-revamp-eyes-liquidity-tokenisation.html "Britain’s post-Brexit asset management revamp eyes liquidity, tokenisation").

ON [WALL STREET](https://www.financedigest.com/weary-wall-street-cheers-improved-consumer-confidence.html "Weary Wall Street cheers improved consumer confidence")

The S&P 500 [stock index recorded its lowest close in almost](https://www.financedigest.com/tesla-ceo-musk-says-he-is-almost-done-with-stock-sales-shares-rally.html "Tesla CEO Musk says he is ‘almost done’ with stock sales; shares rally") two years on Tuesday, hurt by U.S. [rate hike](https://www.financedigest.com/uk-economys-unexpected-bounce-spurs-more-boe-rate-hike-talk.html "UK economy’s unexpected bounce spurs more BoE rate hike talk") jitters.

Michael Purves, chief executive at Tallbacken Capital Advisors in New York, said some of the equity weakness might be related to the UK as volatility there prompts “de-risking,” [including the selling](https://www.financedigest.com/uniper-sells-uae-marine-fuels-refinery-to-consortium-including-montfort.html "Uniper sells UAE marine fuels refinery to consortium including Montfort") of U.S. government bonds.

In times of acute [stress such as during the March 2020 COVID-triggered market](https://www.financedigest.com/market-stress-indicators-react-sharply-after-u-s-bank-failures.html "Market stress indicators react sharply after U.S. bank failures") meltdown, investors sell even safe-haven assets such as Treasuries to shore up liquidity and make up for losses elsewhere in their portfolios.

Britain is the world’s sixth-biggest economy and [around](https://www.financedigest.com/around-the-world-in-mobile-payments.html "Around the world in mobile payments") 5% of the world’s currency reserves are denominated in sterling, highlighting the UK’s importance in the global financial system.

With aggressive U.S. [rate hikes already causing strain across world markets](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets"), for instance through a strong dollar, talk of a global response to calm markets is also growing.

(To) contain inflation we need a [global response, and that global response needs to be to calm down demand,” said Padhraic Garvey, global head](https://www.financedigest.com/new-york-catches-up-with-london-to-head-citys-global-centres-survey.html "New York catches up with London to head City’s global centres survey") of debt and rates strategy at ING Americas. Clearly, as a standalone issue, when the UK [prime minister](https://www.financedigest.com/britains-queen-elizabeth-will-appoint-new-prime-minister-at-balmoral.html "Britain’s Queen Elizabeth will appoint new prime minister at Balmoral") and administration loosens policy on the fiscal side, that doesn’t, by definition, calm demand.

(Reporting by Davide Barbuscia and Saqib Iqbal Ahmed in New York; Additional reporting by Tommy Reggiori Wilkes and Nell Mackenzie in [London and Carolina Mandl in New York; Writing by Megan Davies and Dhara Ranasinghe; Editing by Matthew Lewis)](https://www.financedigest.com/new-york-holds-top-spot-london-second-in-z-yen-financial-centre-survey.html "New York holds top spot, London second in Z/Yen financial centre survey")


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