Five things market-watchers should look out for tomorrow

All financial crises have their peak days, the moment of drama when everything comes to a head. Think of Black Monday – 19 October 1987 – when the bottom fell out of global stock markets, or Black Wednesday – 16 September 1992 – when the pound crashed out of the Exchange Rate Mechanism. With the Bank of England saying that it will cease emergency purchases of gilts tomorrow (although it is reported to have told pension fund managers a different thing in private) could we be facing a Black Friday? Some things to look out for tomorrow morning….

Gilts crash (ie yields rise sharply)? 

This afternoon, things have been going in the other direction. Gilts have been perky, as confidence rises that pension funds have succeeded in offloading sufficient gilts, and raising sufficient cash, to keep themselves out of trouble. 

On Wednesday, it was revealed today, the Bank of England purchased £4.4 billion worth of gilts – the largest purchase in any day since it announced its gilt-buying programme two weeks ago. But yields remain much higher than they were before Kwasi Kwarteng’s mini budget on 23 September. But we will soon find out if pension funds have done enough to cover their positions

Stocks crash? 

Today, the FTSE has been going in the opposite direction to the bond markets, with early gains wiped out. By early afternoon the FTSE100 was showing a loss of 1.5 per cent on the day – this following a dreadful three days at the beginning of he week. Today’s fall in stocks is related to rumours that the government will backtrack on more of Kwarteng’s mini-budget, in particular the Chancellor’s decision to cancel a rise in corporation tax. 

If corporation tax is raised from 19 per cent to 25 per cent it will hit company profits and make shares less appealing. But this is the mood we are in at the moment: three weeks ago the FTSE fell because it thought the mini-budget was irresponsible. Now it is falling because the mini-budget might be cancelled. That is a truly spooked market. At some point we’ll reach a bottom, but many think there are further falls to come first. In contrast to previous crashes we haven’t yet had a day of capitulation when all hope seemed lost. Maybe that is to come.

Pound falls? 

Steep falls in sterling over the past month had many fearing that the pound would soon be at parity with the dollar. It hasn’t happened yet – the pound recovered in line with gilts when the Bank of England announced its purchases a fortnight ago. This afternoon the pound is rising again, and is not far off where is was at the point Kwarteng rose to deliver his mini-budget. That could all change, however, if markets start to fear that the Bank of England’s emergency intervention has not been enough

The Bank of England announces an extension of its emergency gilt-buying programme?

The Bank has been giving mixed messages over the past few days, saying in private that purchases will definitely end on Friday, while apparently reassuring pension fund managers that they would continue if necessary. If there is any sign of trouble in the gilt markets, expect the Bank to effect a sharp U-turn. That won’t necessarily reassure markets, however, as it will confirm the impression that the Bank doesn’t really know what it is doing

Liz Truss resigns? 

Don’t rule it out. Backbench MPs are said to be in mutinous mood. One told a reporter that the Chairman of the 1922 Committee would have enough letters calling for a vote of no confidence in the leader ‘within hours’ were the committee minded to change the rules that say a leader cannot be challenged within 12 months of being elected. Might Truss be forced out by the fabled men in grey suits? It looks a long shot at the moment, but could happen if the Prime Minister decides her situation is hopeless. How markets would respond is another matter. With relief that she is going – or with horror at the realisation we could have another few months of rudderless government as another leadership election is announced?