Garton Global | Monthly Market Digest
Sterling enters October with markets focused on the UK Budget, as rising borrowing costs and uncertainty around tax and spending plans put fiscal credibility firmly in focus. Globally, persistent inflation and elevated energy costs are forcing markets to reassess the outlook for the Fed and BoE, while developments around Iran and the Strait of Hormuz could quickly shift oil prices, bond yields and FX markets. Looking ahead, attention turns to the 28 October Budget, central-bank policy and geopolitical developments, which will shape sterling and wider markets through the month.
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LAST MONTH: September
🌍 Global bonds sold off as higher-for-longer rates took hold
• Global bonds came under pressure as persistent inflation and expectations of further rate rises pushed US and UK government bond yields sharply higher.
• Yields reached levels not seen since around the financial crisis, reflecting growing concerns that inflation would remain elevated for longer.
• The sell-off increased borrowing costs and weighed on bond prices as markets adjusted to a higher-for-longer interest-rate environment.
🛢️ Oil surged above $100 as Iran tensions intensified
• Oil prices surged as renewed US-Iran hostilities increased uncertainty around the Strait of Hormuz, raising concerns over potential disruption to global energy supplies.
• The move pushed Brent crude back above $100 a barrel, increasing energy costs and lifting inflation expectations.
• Higher oil prices also pushed bond yields higher, as markets priced a greater risk that persistent inflation could keep interest rates elevated for longer.
🇬🇧 Sterling held firm as growth offset fiscal concerns
• Sterling was supported by stronger-than-expected UK growth, but rising borrowing costs and uncertainty around the Burnham government’s tax and spending plans kept fiscal concerns firmly in focus.
• Elevated gilt yields increased pressure on government finances, while markets remained sensitive to signs of looser fiscal policy ahead of the October Budget.
• The mixed backdrop kept sterling and UK gilts under pressure, despite the economy proving more resilient than expected.
THIS MONTH: October
🇬🇧 Sterling faces pressure as the Budget takes centre stage
• Sterling is likely to remain sensitive ahead of John Healey’s first Budget on 28 October, with markets focused on potential tax rises and government spending commitments.
• Rising borrowing costs will increase scrutiny of whether the government can maintain its fiscal rules, particularly as gilt yields remain elevated.
• The Budget’s balance between taxation, spending and fiscal discipline is therefore likely to be a key driver of sterling and UK gilt markets through October.
🏦 Central banks reassess rates as inflation remains persistent
• Markets will focus on whether persistent inflation and elevated energy costs force the Federal Reserve and Bank of England to reconsider the pace of monetary easing.
• Higher energy prices could keep inflation elevated for longer, increasing pressure on both central banks to maintain restrictive policy or consider further rate rises.
• The shifting rate outlook is likely to drive volatility across FX and bond markets, as investors adjust expectations for the path of interest rates.
🛢️ Oil remains volatile as Iran and Hormuz risks persist
• Oil prices are likely to remain highly sensitive to developments around Iran and the Strait of Hormuz, with any escalation or progress towards a settlement capable of quickly shifting supply expectations.
• A renewed disruption could lift inflation expectations and bond yields, while easing tensions could reduce pressure on energy prices.
• These moves are likely to feed through into FX markets, as investors reassess inflation and interest-rate expectations across major economies.
Have a great month,
The Garton Team.