Contrition can be disarming. But Kwasi Kwarteng’s U-turn on the abolition of a 45p tax rate for high earners will not restore the UK’s fiscal credibility. The measure accounted for under 5 per cent of the £45bn package of unfunded tax cuts in the “mini” Budget 10 days ago.
Moreover, the reverse ferret has proved a damaging thesis about the UK chancellor and Prime Minister Liz Truss. It is this: they lack the judgment to intuit the mood of markets or their own party.
Their original unforced error led to an extreme jump in gilt yields. The disarray is ominous. Markets are febrile. Modest bad news can trigger massive sell-offs, as US tech stocks have also shown.
The gyrations of the UK bond market are exceptional. But signs of stress are widespread. In the US, the Move (Merrill Lynch Option Volatility Estimate) index rose to its second-highest level since 2009 last Wednesday. This index, derived from options on Treasuries, captures bond market volatility, much like the Vix index does for stocks.
The UK has made itself vulnerable to a battering from bond vigilantes. Kwarteng put the UK’s reputation at risk by dispensing with forecasts from the Office for Budget Responsibility, firing the Treasury’s top official and implausibly targeting 2.5 per cent growth.
But he is right to point out that the UK has a lower debt burden than most other G7 countries. Its peers are swallowing the same toxic cocktail of high inflation, slowing growth and tightening monetary policy. For many, the fight against inflation is handicapped by the surge in the dollar.
The war in Ukraine and tensions with China add to the uncertainties.
This is treacherous territory for investors. But there are opportunities too. High volatility can help global macro hedge funds, which try to anticipate moves across interest rates, currencies, equities and commodities. The HFRI Macro index is up 9 per cent this year.
Good quality shares with low indebtedness and high dividend yields should prove resilient. Value stocks outperform growth equities in periods of high inflation and rising bond yields, according to a UBS analysis of data going back to 1975.
The price of 30-year gilts is down nearly a third over the past year. The FTSE 100 has fallen by less than a tenth as much. That is not the normal pattern. As markets move further into uncharted territory, there will be more nasty surprises.