Scale Of UK's Market Slide Spells Out Home Truths

This week's plunge in UK financial assets accelerated a longer historic decline signalling a loss of confidence among international investors that Britain may find hard to restore.

Markets have been in turmoil since finance minister Kwasi Kwarteng outlined a new economic agenda last Friday. The pound fell to a record low against the U.S. dollar just above $1.03 on Monday and British government bonds have endured some of their worst losses since modern records began.

Analysts with major international banks say the market moves indicate a sudden evaporation of investor confidence in Britain, built up over decades but questioned increasingly by investors since the 2016 vote for Brexit.

They are sceptical about Kwarteng's pledge that improved economic growth will pay for Britain's new high-spending, low-tax strategy, and are worried about the lack of detail on his stated commitment to fiscal responsibility.

Kwarteng says he will flesh out plans in a Nov. 23 budget statement.

Prime Minister Liz Truss on Thursday said the recent upheaval reflected global moves in markets.

While other currencies have fallen sharply against an ascendant U.S. dollar, and government bond yields around the world have been dragged higher by the Federal Reserve's push to raise U.S. interest rates, Britain is an outlier.

"UK fiscal policy is now firmly in the spotlight of the international investor community, with a loss of credibility that will be difficult to fully recover any time soon," J.P. Morgan economist Allan Monks said earlier this week.

The pound is vying with Japan's yen as the worst-performing G10 currency in the year to date against the dollar, with both down around 20%. Sterling has been the weakest G10 currency against the euro in the last three months.

Graphic: Major currencies vs. the dollar

British gilts have fared far worse than German, French or U.S. government debt, even accounting for currency moves.

The gap between 10-year British and German government bond yields blew out to 230 basis points at one point earlier this week - the widest since 1990.

Graphic: UK government bond yield spread UK government bond yield spread

The difference between the two bond yields was for decades viewed as a gauge of Britain's inflation-fighting record versus low-inflation Germany, whose Bundesbank central bank the British sought to emulate.

The sustained narrowing of the spread after the Bank of England became operationally independent of the government in 1997 has long been viewed by British economic policymakers as a major achievement.