Risk-sensitive assets are staging a mild recovery this morning after the UK government said it would shelve a package of unfunded fiscal measures that had triggered alarm in gilt and global funding markets. Equity indices are setting up for a stronger open and the ten-year US Treasury yield is pushing back below 4 percent, providing relief across the financial system. The dollar is weaker, and commodity linked units are rising on the crosses as traders hesitantly tiptoe back into still-turbulent foreign exchange markets.

The pound jumped and gilt yields fell after new chancellor Jeremy Hunt reversed virtually all of his predecessor’s proposed tax and spending measures, bowing to pressure from markets. A previously open-ended “energy price guarantee” designed to shield households from soaring gas and electricity costs, will now expire in April.

The move should reduce the need for jumbo-sized rate hikes at the next central bank meetings. Markets now expect less than 175 basis points in rate hikes before year end, down sharply from more than 275 at the peak.

But a number of senior Conservative Party members are openly calling on Prime Minister Liz Truss to quit. Friday’s press conference, in which she appeared to claim her policies would not be reversed, raised deeper questions about her leadership, and set the stage for another challenge in the months to come – something that could trigger renewed volatility.

Separately, the Bank of England followed through on its commitment to end bond purchases, issuing a statement saying its response to volatility in gilt markets was designed to address temporary risks to pension plans, “not to provide a permanent backstop”. It said its measures had “enabled a significant increase in the resilience of the sector”.

The yen continues to grind lower, inching toward the psychologically-important 150-to-the-dollar mark as traders tempt authorities to step in. Although there have been rumours of small-scale buying from the central bank, signs of direct intervention have been difficult to discern. Talking to reporters last night, Finance Minister Shunichi Suzuki warned “If there are excessive moves triggered by speculators or others, there’s absolutely no change in our stance that we’ll take bold action”. On a year-to-date basis, the currency has fallen almost 23 percent.

Raw materials prices are down and the offshore yuan is weaker after Chinese president Xi Jinping expressed continuing support for a draconian response to coronavirus outbreaks. In a speech opening the twentieth National Congress of the Chinese Communist Party, Xi said “We have adhered to the supremacy of the people and the supremacy of life, adhered to dynamic “zero-covid” … and achieved major positive results in the overall prevention and control of the epidemic”. Although expectations had faded in the face of an official communications campaign, many investors had hoped China’s supreme leader would signal a relaxation in the approach that has inflicted terrible harm on the domestic economy.

There are no major economic data releases scheduled for today. The week ahead is also relatively bereft of obvious volatility catalysts, although a steady flow of housing market data in Canada and the US could prove helpful in illustrating the effects of monetary tightening on the most important asset class in both economies.

Karl Schamotta, Chief Market Strategist