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Investors look to North America as the U.K. falls into economic meltdown

Investors are backing away from UK bonds as they fear debt could spiral out of control.

The City of London. — © AFP Philip FONG
The City of London. — © AFP Philip FONG

The mid-parliament change of Prime Minister in the U.K. and the resultant new cabinet has not been a great success despite being in office for only a few weeks. A budget last week has led to the most ‘unconservative’ of Conservative policies: massive borrowing. This is borrowing to pay for tax cuts for higher earners.

The market reaction has been savage, with the British pound plummeting against the U.S. dollar.

Labour Party leader Sir Keir Starmer has called for Parliament to be recalled, according to the BBC. This is so MPs can abandon last week’s mini-budget “before any more damage is done”. This, however, does not look likely and the signs are that the economic turmoil will continue.

As the markets continue to be rocked, Daniel Takieddine, CEO MENA BDSwiss tells Digital Journal that the situation is likely to push more investors across the Atlantic leading top North America being the major beneficiary.

Takieddine notes that the economic situation shows no signing of slowing down any time soon: “The confidence crisis surrounding the latest actions announced by the British authorities seems to find no end as investors become ever more cautious. The successive announcements made by the government and the Bank of England have put the markets in disarray.”

There are clear market signals where companies are shifting away from the U.K. stock markets, which Takieddine explains: “Investors are backing away from UK bonds as they fear debt could spiral out of control in light of the tax cuts announced by the government. This in turn has pushed yields up and prompted the central bank to intervene.”

One of the likely outcomes in the U.K.is an intervention from the Bank of England. Takieddine is unsure if this will help, stating: “Such an intervention from the central bank could undermine its efforts to quell inflation. Its intention to start buying bonds to support the debt market has stopped yields from spiking and pushed the stock market higher today. However, it could fuel more volatility and add pressure on the British pound.”

The pound fell to a 37-year low against the dollar
The pound fell to a 37-year low against the dollar – Copyright AFP Peter PARKS

Takieddine is not optimistic about the U.K. economy recovering in the short term. In fact, he predicts that the economic situation will get worse before it gets better: “The currency has already reached historic lows against the dollar due to the aggressive stance of the Federal Reserve and could see more losses now against other major currencies like the euro or the Japanese yen.”

The situation is likely to drive investors across the Atlantic. Takieddine  predicts: “These conditions could push investors away from UK markets towards safer assets. This comes at a time when sentiment among investors is already fuelled by risk-aversion. The U.S. dollar and US markets in general could be major beneficiaries as investors could flock in their direction.”

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Dr. Tim Sandle is Digital Journal's Editor-at-Large for science news. Tim specializes in science, technology, environmental, business, and health journalism. He is additionally a practising microbiologist; and an author. He is also interested in history, politics and current affairs.

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