Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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UK holds UnBrexit referendum
Jessica Amir
Market Strategist
Summary: "Supply side tax cuts and demand-boosting subsidies for energy are a toxic cocktail for a country’s bond and currency markets." - Jessica Amir.
The record brief tenure of UK Prime Minister Liz Truss in 2022 made the UK policy dilemma clear: supply side tax cuts and demand-boosting subsidies for energy are a toxic cocktail for a country’s bond and currency markets when that country runs massive twin budget/trade deficits. Taking over from the Truss-Kwarteng duo in 2022 was the Rishi Sunak-Jeremy Hunt duo, who only deliver depressing fiscal austerity via tax hikes and spending cuts. Does it increase the sustainability of the UK debt trajectory? For a time, maybe. But it’s just an alternative toxic cocktail to a crack-up inflationary reset that Truss-Kwarteng might have delivered, had it been given a chance.
In 2023, Sunak-Hunt manage to take Tory popularity ratings to unheard-of lows as their brutal fiscal programme throws the UK into a crushing recession, with unemployment soaring and, ironically, deficits soaring too as tax revenues dry up. Public demonstrations break out, demanding that Sunak call snap elections because of the lack of a popular mandate. Amidst the economic ruin, polls even in England and Wales indicate second thoughts on the wisdom of Brexit. Many note that the overwhelming majority of the young generation were in favour of Remain in the first place, with over 80 percent of 18- to 24-year-olds voting Remain, versus nearly two-thirds of those aged 65-plus voting to leave, many who have since passed away and very few of whom are still in the labour force.
Sunak finally caves and calls an election, resigning to allow a new Tory profile to take charge of the battered party. Labour leader Keir Starmer, noting the popular support for a second Brexit referendum and the Lib Dems surging in the polls as they clamour for a new referendum, runs on a platform of non-alignment on the Brexit question but supports a second referendum to rejoin the EU along the lines of the David Cameron deal struck before the original 2016 referendum. A Labour government takes power in Q3, promising an UnBrexit referendum for November 1, 2023. The ReJoin vote wins.
Market impact: after a weak performance in early 2023, GBP recovers 10 percent versus the EUR and 15 percent versus the CHF on the anticipated boost to the London financial services sector.Latest Market Insights
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