Swissquote Bank: NEXT!

October 21, 2022

By Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank

The biggest news of yesterday was the resignation of the UK PM Liz Truss, after having wreaked havoc across all British asset classes in just 44 days in office, as she aimed to spend BIG but without a serious plan on how and who would finance all that spending.

In just 44 days, the British pound lost up to 8% against the euro, more than 10% against the US dollar. The 10-year gilt yield rose 55%, while the 30-year gilt yield skyrocketed 60%. The Bank of England (BoE) had to intervene in emergency to save the country’s pension system. 

Liz Truss’ depart wasn’t a surprise.  

Normally, a PM resignation means uncertainty and limited visibility; it’s not a preferred scenario for the market. But the little time Liz Truss stayed in power was so hectic that investors welcomed the news that she departs sooner rather than later.  

Sterling and the British sovereigns gained although Cable is back below the 1.12 at time of writing 

Of course, what happened in the UK over the past weeks is also a warning - for the new PM and his/her team - that there are limits that cannot be breached. Financial discipline is one of those. Britain learned it the hard way.  

Who will replace Liz Truss? 

Rishi Sunak seems like the best option. The previous Chancellor of Exchequer has a solid track record; he knows he can’t spend, or make tax decisions without justification. He knows that, despite the unideal economic environment, he can’t increase debt without increasing the cost of borrowing. And more importantly, he is supported by the market.  

Penny Mordaunt is another candidate that could replace Liz Truss.   

And finally, Boris Johnson could be back in the race! He quit because of scandals. But none of them seems as a big deal compared to Liz Truss who destroyed confidence in the UK government, and almost abated the British pension system. 

Whoever it is, the main challenge for the next PM will be to reassure the markets! We expect to see some more bumpy trading for the British assets until the dust settles. In this respect, Cable will likely see a strong resistance around its 50-DMA, which stands near 1.1440, and the 1.15 psychological mark, and we could see the pair test the 1.10 mark yet again.  

But the latest British turmoil could be an opportunity to return to British assets at interesting prices. 

Zooming out 

The US dollar continues extending its rally across the board, and there is nothing the other currencies can do. 

 The dollar-yen is now trading above the 150 level, with prospect of another Bank of Japan intervention. The Japanese inflation remained unchanged near 3% in September. The import prices due to the weakening yen is one of the reasons for the rising consumer prices in Japan, but the BoJ is not willing to hike the interest rates just yet. Any FX intervention sill likely offer interesting dip-buying opportunities.  

Earnings 

American Airlines’ revenue rose 13% last quarter compared to the same time in 2019, while they flew 10% less. Higher prices helped compensate rising fuel and labour costs. The company said they will get back to their full 2019 capacity next year.  

United Airlines and Delta Air Lines also said that they would be profitable through the end of the year thanks to strong bookings and fares.  

But American Airlines still fell 3.80% and remains under a decent selling pressure, as the S&P500 closed 0.80% lower. 

Snap nosedived 27% in the afterhours trading, after reporting the lowest ever quarterly sales growth due to lower advertising spending.  

On the macro front, the Philly Fed manufacturing index came in softer than expected, but the weekly jobless claims fell – which certainly fueled the hawkish Fed expectations.