Stocks fell today (what else is new) as investors wondered whether the market would ever rally again. The Dow, S&P, and Nasdaq Composite all closed lower while yields surged. The biggest stressor today was without a doubt the British pound’s sudden plunge over the weekend, which was sparked by a UK mini-budget released Friday.
Britain’s new chancellor of the exchequer, Kwasi Kwarteng, has perhaps lost the trust of Britons in record time following his budget release. The UK is plagued by high inflation and rising energy costs.
In response, Kwarteng is going to cut taxes while increasing government spending substantially.
This wounded the pound Stirling immensely. Futures trading over the weekend was halted temporarily after the pound fell to a record low of just $1.035.
This translated into additional strength for the dollar, which hammered virtually every risk asset lower.
Pound bulls were desperately hoping for emergency intervention from the Bank of England (BoE). Several hours after the pound notched a new record low, the BoE spoke.
“I welcome the Government’s commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances,” said Andrew Bailey, Governor of the BoE.
“As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly. The MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.”
Sorry, Britons. No help from the BoE until at least its next meeting. More pain is likely in store for the pound as the situation continues to deteriorate.
Many European politicians took this as an opportunity to “dunk” on Brexit, which is rich considering that the Euro has also crashed relative to the dollar and the EU faces an arguably worse situation than the UK does this winter.
It was bad news all around this morning, including a worse-than-expected Dallas Fed Manufacturers Survey that found survey respondents gearing up for a harsh 2023.
Things aren’t looking all that good for banks, either. Charles Schwab (NYSE: SCHW) closed slightly lower today after plunging to support on Friday. The stock hit support (yellow line) before rallying slightly.
Now, though, after setting a lower high, SCHW seems primed for a bearish breakout below support and the 50-day moving average.
For those reasons, it might make sense to take SCHW short with a trade trigger of $69.11, below support, as the general market digests the ongoing difficulties of a roaring dollar (and sinking pound).
