UK tax rebate bounces stocks and pound

SYDNEY, Oct 4 (Reuters) – Asian shares bounced on Tuesday after Britain scrapped parts of a controversial tax cut plan, temporarily improving global market sentiment and boosting bonds and the pound.

Adding to that sense of relief in markets, Australia’s central bank surprised investors by raising interest rates by less than expected by 25 basis points, saying they had already risen significantly. .

That pushed the Australian dollar lower, lifted the S&P/ASX 200 index (.AXJO) by 3.6% and spurred the benchmark 3-year bond to its best day in 13 years.

In trade thinned by holidays in China and Hong Kong, MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) rose 1.7%, led by gains in Australia.

British shares looked set to jump, with FTSE futures up 0.8%.

“It feels short-term that it’s a bit oversold,” said Geoff Wilson, chief investment officer at Wilson Asset Management in Sydney.

“Is this the bottom? It’s almost impossible to pick the bottom, but I don’t think so,” he said, referring largely to the markets.

Japan’s Nikkei (.N225) rose 2.8%. Sterling drifted to a near two-week high of $1.1343, retreating now nearly 10% from a record low hit last week after plans for unfunded tax cuts unleashed havoc on UK assets.

“The about-face … will not have a major impact on the overall UK financial situation in our view,” NatWest Markets’ head of economics and market strategy John Briggs said.

“(But) investors took it as a signal that the UK government could and is at least partially willing to back down from its intentions that so disrupted markets in the past week.”

Investors also took heart from stability at the long end of the gilt market, although emergency purchases by the Bank of England were only relatively modest.

S&P 500 futures rose 1%, following a 2.6% overnight decline for the index (.SPX).

UK Chancellor of the Exchequer Kwasi Kwarteng released a statement reversing planned tax cuts for top earners. That makes up just £2bn of a planned £45bn of unfunded tax cuts that had sent the gilt market into a tailspin last week.

South Korea’s Kospi (.KS11) jumped 2.5%, lifting from last week’s two-year low, despite North Korea firing a missile over Japan for the first time in five years.

STERLING SPELL

The rise in sterling has rattled some nerves in currency markets, although the continued strength of the dollar still keeps many major currencies close to milestones and has governments across Asia on edge.

Japan’s yen hit 145 against the dollar on Monday – a level that prompted official intervention last week – and was last at 144.71. The euro was at $0.9838, about three cents stronger than last week’s 20-year low.

Chinese authorities have rolled out maneuvers to support the yuan, ranging from unusually strong signals to the market to administrative measures that increase the cost of shorting it.

“More volatility is almost certainly assured as currency markets refocus on recession risks in the US, which continue to build,” ANZ senior economist Miles Workman said, with US jobs data on Friday the next big data point on the horizon.

The Australian dollar fell to $0.6451 after the central bank meeting. The Reserve Bank of New Zealand meets on Wednesday and the kiwi held just above $0.57.

Government bonds rose in sympathy with gilts overnight, and the benchmark 10-year yield fell 15 basis points. It was flat in Asia at 3.62%, after surging past 4% last week.

Other indicators of market stress abound. The CBOE Volatility Index (.VIX) remains high and above 30. Shares (CSGN.S) and bonds of Credit Suisse hit record lows on Monday as concerns about the bank’s restructuring plans swept the markets.

Oil held up overnight on news of possible production cuts, with Brent futures last up 43 cents at $89.29 a barrel.

Editing by Sam Holmes

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