Europe edges higher as UK U-turns settle nerves

LONDON/SYDNEY, Oct 17 (Reuters) – Europe’s share, bond and currency markets moved tentatively higher on Monday, helped by relief that’s Britain new finance minister had quickly ripped into the unfunded tax cuts that triggered turmoil in UK assets this month.

Asia’s main markets had struggled overnight but Europe’s STOXX 600 (.STOXX) made a 0.5% early gain as both the pound and UK government bonds rallied in London. /GB/FRX

Britain’s new finance minister Jeremy Hunt is due to make a statement at around 1000 GMT. He spent much of the weekend holding meetings and doing media interviews signalling that many of the spending plans of Prime Minister Liz Truss and his predecessor, would now be scrapped.

Bank of England Governor Bailey gave Hunt a vote of confidence on Saturday, saying they had an “immediate meeting of minds” on the need to fix the public finances, where there are estimates of a 70 billion pound ($78.72 billion) black hole.

Invesco’s director of macro research Ben Jones said the UK’s volatility would remain a key focus for global markets.

“The hope is that Jeremy Hunt is a more stable set of hands,” he said, pointing to the “relief rally” for the pound which was up 0.75% at $1.1257, and in the UK gilt markets.

“But we still need to see some follow through… and we still don’t know whether Liz Truss will still be there at lunchtime or the end of the month”.

Yields in British 10-year gilts fell 27 bps to 4.06% in morning trading, while the 2-year dropped 12 bps to 3.75%. .

Other European markets benefited too. The German 10-year Bund yield was down 9 basis points (bps) to 2.27% having hit 2.423% last week, its highest since August 2011.

That was also despite two key ECB policymakers making the case over the weekend for cutting the bank’s balance sheet and after U.S. inflation data on Friday had bolstered bets on another aggressive rate hike from the Federal Reserve.

ROTATING

Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) eased 0.6% and back toward last week’s 2-1/2 year low.

Japan’s Nikkei (.N225) shed 1.2% although Chinese blue chips (.CSI300) rose 0.4% ahead of GDP data due on Tuesday.

S&P 500 futures edged up 0.4% after Friday’s sharp retreat, while Nasdaq futures added 0.3%.

While the S&P is an eye-watering 25% off its peak, BofA economist Jared Woodard warned the slide was not over given the world was transitioning from two decades of 2% inflation to a time of something more like 5% inflation.

“$70 trillion of ‘new’ tech, growth, and government bond assets priced for a 2% world are vulnerable to these secular shifts as ‘old’ industries like energy and materials surge, reversing decades of under-investment,” he wrote in a note.

“Rotating out of 60/40 proxies and…