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BOV Market Watch - Week ending 30th September 2022
30 Sep 2022

U.K.’s Mini Budget. Last Friday’s first fiscal policy announcement from new British Prime Minister Liz Truss’s government has been met with one of the most pronounced markets sell-offs in recent history. The sterling foreign exchange and credit markets perceived this as an “erosion of confidence” and lead to high market volatility. Pound sterling plummeted, hitting an all-time low against the US Dollar in early Monday morning while the UK 10-year gilt’s yield rose sharply by about 1.5 percent, to its highest level since 2008, as disarray continued following the new Chancellor Kwasi Kwarteng’s “mini-budget”. The announcement mainly featured broad tax cuts amounting to about huge 45 billion pounds, not seen in Britain since 1972, and some 60 billion sterling in energy support to households and businesses. Their sole aim is to boost growth through tax and regulatory reform, with the new finance minister indicating that more tax cuts could be on the way. These will be funded mainly by borrowing, leading to the biggest increase in borrowing in 50 years, notwithstanding that the UK is facing slowing growth and twin deficits.

This massive loose fiscal policy was taken negatively by the financial markets, as it is not complementary with the prevailing Bank of England’s Sterling 80 billion Quantitative Tightening implementation, over the coming year. This fiscal development will create pressure on the BoE that now it will need to tighten policy more aggressively than it otherwise would have in order to counteract the additional inflationary pressures stemming from this fiscal stimulus measures. On Thursday, the BOE extraordinarily announced that it will buy 65 billion pounds of UK Gilts in order support the credit markets.

U.S. September Consumer Confidence beats expectations. The Conference Board reported on Tuesday that consumer confidence in the U.S. improved better than expected, as the consumer confidence index rose to 108.0 in September from an upwardly revised 103.6 in August. The index improvement was better than the 104.3 level expected and was the second consecutive monthly gain driven particularly by jobs, wages, and declining fuel prices. Purchasing intentions were diverging, with home purchasing intentions lower, while intensions to buy autos and appliances higher. The improvement in confidence, which was partly driven by declining fuel prices, to their lowest level year to date, may augur positively for consumer spending in the final months of this year. However, rising interest rates and inflation remain a drag to consumer sentiment.

World Bank downgrades East Asia & Pacific Growth Forecast. The World Bank revised lower its economic growth forecasts for the East Asia and the Pacific region. It now forecasts East Asia and Pacific to expand 3.2 percent in 2022 instead of 5.0 percent projected in April, much lower than last year’s 7.2 percent growth. China, which accounts for some 86% of the region’s output and which previously led recovery, is projected to grow by 2.8% in this year, below the government’s 5.5 percent target. This is a sharp slowdown from last year’s 8.1 percent growth, as the zero-COVID measures disrupted supply chains, industrial and services production, domestic sales, and exports. Global economic slowdown, rising interest rates, inflation and policy distortions will cause headwinds to growth to this region.

German Ifo Business Confidence continued to decline. On Monday, Germany’s ifo Institute published its September’s survey of  business confidence which revealed that it declined to the lowest level since May 2020. The index fell sharply to 84.3 in September from 88.6 in August, well below economists' forecast of 87.0, and indicating that the Germany economy is falling into a recession. Companies assessed their current business as clearly worse and pessimism regarding the coming months has grown, ifo President Clemens Fuest said. Business confidence deteriorated across all four main sectors of the economy, namely manufacturing, service sector, construction, and trade. This sharp decline in sentiment adds to uncertainty surrounding the German economy which is facing acute concerns regarding energy supplies and declining real household incomes. This indicated that German GDP is expected to contract in the second half of this year.

 

 

 

 

 

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).