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Shares and pound splutter as UK dishes out budget gruel

By Marc Jones

LONDON (Reuters) - Nagging recession and interest rate worries had Europe's markets spluttering on Thursday, and the pound started to sag as Britain sought to put its disastrous recent fiscal experiment behind it with an austere-looking budget.

Trading got off to a choppy start as optimism about Siemens ' (DE:SIEGn) earnings and that the European Central Bank might slow its rate hikes gave way to the selling that dogged Wall Street and Asia overnight.[.EU][.N][.SS][.T]

That was driven by renewed Fed policymaker talk that rates could shoot up further. It meant the dollar was fractionally higher after a recent 7% slump, though Europe's lower government debt yields suggested the bond markets were largely indifferent.

Sterling had gone from $1.193 to $1.1850 against the greenback in London by the time the country's new finance minister Jeremy Hunt began his budget plan with news of 55 billion pounds ($64.93 billion) of tax rises and spending cuts.

He and Prime Minister Rishi Sunak hope it will restore confidence after former PM Liz Truss' unfunded tax cut plans caused widespread panic, sent the pound to an all-time low and forced Truss to quit after just 50 days in charge.

DoubleLine portfolio manager Bill Campbell said the pound's rebound over the last month meant the budget's main headlines were probably already priced in, and that Britain's experience may well be mirrored elsewhere, especially with recessions looming and an ongoing energy crisis.

"The market has basically told the UK government that it is not gong to accept anything too aggressive on the fiscal stimulus front," Campbell said.

"It seems like we are moving into a fairly risky environment," he added, referring to likelihood that EU countries will try to frontload their borrowings next year. "I think it's highly likely that we could see some repeats of what happened in the UK". (Graphic: Pound and UK Gilt recover from 'mini budget' turmoil - https://fingfx.thomsonreuters.com/gfx/mkt/gkplwgxakvb/Pasted%20image%201668679362423.png) Overnight in Asia, grim signals from Micron Technology (NASDAQ:MU) about excess inventories and sluggish demand sent chipmaker stocks sprawling.

On Wall Street, stronger-than-expected U.S. retail sales had suggested the Federal Reserve was unlikely to relax its battle with inflation and futures pointed to another modest dip later. [.N]

That all fuelled concerns about the economic outlook, with the U.S. Treasury yield curve remaining deeply inverted in European trading and suggesting investors are braced for recession.

The 2-year/10-year curve had closed beneath -60 bps for the first time since 1982 on Wednesday "which is concerning when you consider its historic accuracy as a leading indicator of recessions," Deutsche Bank (ETR:DBKGn)'s Jim Reid said.

Hong Kong's Hang Seng Index had closed 1.15% lower after tech stocks slumped as much as 4% at one point. Mainland Chinese shares also wobbled, with blue chips there falling 0.5% having ripped 10% higher this month.

Japan's Nikkei lost 0.35% and South Korea's Kospi dropped 1.4%, each led by declines in heavyweight chip players.

The Philadelphia SE Semiconductor Index slumped 4.3% and the tech-heavy Nasdaq had dropped 1.5% after Micron said it would reduce memory chip supply and make more cuts to its capital spending plan.

FED UP

Wall Street futures indicate little in the way of respite at the open, pointing to 0.5%-0.6% falls on the Nasdaq or the S&P later. [.N]

Traders will also scrutinise speeches from Fed officials on Thursday for hints about rate hikes. Regional Fed Presidents Raphael Bostic, Loretta Mester and Neel Kashkari are all due to speak.

Hawkish remarks from Fed officials on Wednesday added to doubts about a shift in policy, with San Francisco Fed President Mary Daly - until recently one of the most dovish officials - saying a pause was off the table and that "somewhere between 4.75 and 5.25 seems a reasonable place" for the Fed to aim for with rates.

Money markets give 93% odds that the Fed will slow to a half-point rate increase on Dec. 14, with a 7% probability of another 75 basis point increase. Traders still see the terminal rate close to 5% by next summer, up from the current policy rate of 3.75-4%.

The dollar's DXY index was up almost 0.5% as its momentum built again. The euro down at $1.03, the risk-sensitive Aussie dollar tumbled 1% and China's yuan weakened 0.35% as new COVID cases caused concerns that officials could order more lockdowns.

Japan's yen couldn't do much either, dipping 139.85 per dollar although as it continued to trade around its highest level for three months. The dollar plunged 3.7% last week when U.S. consumer inflation data for October came in lower than expected.

"Fed commentary, like the resilient spending numbers, gave little succour for anyone looking for an imminent pivot," with caution permeating markets as a result, Ted Nugent, an economist at National Australia Bank (OTC:NABZY), wrote in a client note.

U.S. 10-year Treasury yields bounced modestly from a six-week low at 3.671% hit overnight in Tokyo trading, last standing at about 3.72%, while the two-year yield consolidated near its lowest level since Oct. 28 around 4.37%.

Gold slid 0.6% to about $1,763 an ounce against a firmer dollar.

Crude oil steadied in Europe after settling more than a dollar lower overnight, following the resumption of Russian oil shipments via the Druzhba pipeline to Hungary and as rising COVID-19 cases in China weighed on sentiment. [O/R]

Brent crude futures were last at $92.30 a barrel have slipped below $92 overnight, while U.S. West Texas Intermediate (WTI) crude hovered at $84.85 a barrel.

($1 = 0.8471 pounds)

(This story has been refiled to fix typographic error in quote in paragraph seven)

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