Geopolitics and Markets Review 3rd October 2022:

UK chancellor Kwasi Kwarteng took a U-turn on the 45p tax rate, and it will no longer be scrapped. The initial proposal of the policy caused the pound to plummet towards parity against the dollar. Intervention from the BoE led to a reversal. The BoE had to intervene as UK bond (GILTs) yields skyrocketed so bond prices dropped. This led to pension funds that invest through liability-driven investment to the risk of default. These funds own lots of GILTs to cover current and future liabilities. As bond prices continue to fall, they had to sell their positions to provide liquidity for their funds, which led bond prices lower.

The intervention from the BoE was £65B on bond buying, or in secret whispering terms, more quantitative easing. The intervention led to global markets rising on Wednesday, the Hang Seng up 1.3%, the ASX up 1.8% and the Dow up around 1.9%. It’s all good though, the market will get battered later when inflation figures continue rising.

This is another reason the mini-budget made little sense. The government already proposed the £150B energy bailout to cap bills at £2500 for the next two years. Germany is following suit with a potential €200B energy bailout. How necessary these are is up for debate, and it depends on what you focus on, getting inflation back down or stopping runaway energy bills.

It all stems down to us not having enough of what we need. As global supply chains continue to be disrupted in a new bipolar world, it will take time to establish new supply and new partners. Even then, we might not return to the levels of free trade under globalization we took for granted. The majority of people will carry on in their recency bias-filled worlds. Countries need to pivot towards self-sufficiency, and you should too. Be prepared for anything. Geopolitics is ever-changing and who knows if tomorrow you can trust the countries you thought were your closest chums.