Global Markets yo-yo

Global markets have staged a strong recovery overnight and as we get going this morning, following yesterday’s collapse.

The Nikkei was the biggest loser, falling 13% from Friday to close of play on Monday, but in last night’s session put on more than 10% as investors couldn’t help but buy the dip.

European bourses have less to make up than Japan but look like they’re heading in the right direction following the opening bells. The US market will open this afternoon, but futures are pointing to that being positive also.

The initial sell-off had led to investors screaming for an emergency rate cut by the Federal Reserve and yesterday the market had priced in a 60% chance of that happening. With this correction we’d say that out of cycle intervention looks much less likely, but we do expect to see more rate cuts by the end of the year than we were expecting last year.

The blame for such a big capitulation is heading towards hedge funds, which use a “carry trade” to fund their investments. In simple terms, hedge funds borrow in yen where interest rates are really low, then invest globally hoping to make big returns in global markets whilst benefitting from such cheap debt.

The problem they ran into was when Japan lifted their base rate last month for only the second time in 8 years, which helped the Yen rally by more than 10% in a month, all of a sudden turning cheap debt into an expensive headache.

In the UK, warm weather has helped retail sales which rose 0.5% in July compared to last year. It’s not a number to get too excited about and following June’s 0.2% decline, the August print is going to have to be really strong to eke out a better than average summer performance. For context, July 2023 saw a 1.5% increase year on year.

Meanwhile Rachel Reeves is working out how best to fill the £22bn ‘fiscal hole’ and though tax hikes are likely to make up some of the deficit, the chancellor hasn’t ruled out tweaking the way that debt is measured. Currently the assessment of debt includes accounting for losses that the Bank of England makes on its bond buying programme, but if you discount those from the numbers, they’d be able to borrow £17bn more without breaking debt limits.

We’ve got plenty of time to speculate as to what will and won’t be though, as the budget comes on the 30 October.

Yesterday afternoon the prime minister of Bangladesh, Sheikh Hasina, was flown out of her official residence as protesters gathered outside in their thousands.

Following her emergency evacuation (which eventually saw the PM arrive in India), demonstrators broke into the palace.

With tensions mounting, the Chief of the Army, General Waker-uz-Zaman, confirmed to the nation that Sheikh Hasina had resigned ahead of announcing that there would be an interim government formed before new elections.

Little detail was given over what would constitute the interim government or the nature of the elections thereafter. Such lack of information spread fears that the army could seize power, with students’ movements maintaining that they will not accept a military-led government.

Instead, a co-ordinated body of student groups, which have been at the forefront of the demonstration, are demanding Muhammad Yunus is put forward as the chief advisor of the interim government.

The 86-year old Muhammad Yunus, won Nobel Peace Prize in 2006 for his work in establishing Grameen Bank which helped lift millions out of poverty through a microcredit initiative.

The dramatic events of yesterday afternoon are set against a backdrop of weeks of demonstrations which have resulted in dozens being killed and thousands being arrested (with some estimates being substantial higher on the number of fatalities).

The catalyst for the latest demonstrations involved the government’s plans to reintroduce a quota which would see 30% of government jobs allocated to descendants of those who fought for Bangladesh’s in their war of independence from Pakistan in 1971. Students protested that the measures would unjustly benefit those connected to the PMs party.

With Sheikh Hasina leading Bangladesh for 20 of the last 28 years, her fleeing yesterday was all the more tumultuous. As the BBC’s Anbarasan Ethirajan and Tessa Wong put forward, “in recent years [Sheikh Hasina] has been accused of turning autocratic and clamping down on any opposition to her rule. Politically motivated arrests, disappearances, extra-judicial killings and other abuses have all risen under her rule.”

Attention now turns to how the demonstrations will unfold now that Hasina has resigned.

With UK retail sales already out and positive, we’ll turn our attention to Construction PMI numbers out this morning, which are also expected to be strong. At 10am we’ll get European retail sales and then at lunchtime the Bank of England release their ‘Asset Purchase Report’, which is the document the chancellor will be pouring over to work out how much QE is costing the bank and whether they can justify stripping it out of her own borrowing calculations.

This afternoon is very quiet on the data front, so we’ll turn our attention to the velodrome, where GB’s men’s team will hope to follow the women’s success yesterday in the team sprint.

Have a great day.