Last Week In Review: A Financial Roundup
Monday
Economy ‘likely to shrink’ as budget gloom spreads
Rachel Reeves's first budget has been criticized for contributing to a decline in UK business confidence, now at its lowest point in nearly two years, according to a BDO index. The consultancy's optimism tracker fell by 5.8 points to 93.5 in November, marking the largest monthly drop since August 2021. Its economic output index also fell to 94.7, signaling contraction. Separate data from the Recruitment and Employment Confederation showed declining job vacancies and rising redundancies following the budget announcement.
The budget, introduced on October 30, included £40 billion in tax increases, such as a £25 billion rise in employers’ national insurance contributions. Economists warn this could drive higher inflation, weaken wage growth, and deter hiring. Inflation is expected to rise from 2.3% in October to 2.6% in November, complicating the Bank of England’s efforts to reduce interest rates further. Businesses face cost pressures despite the government's gradual reduction of borrowing costs to 4.75%.
The budget also raised the minimum wage by 6.7% and implemented major workers' rights reforms, adding mixed reactions among businesses. While KPMG found that most private business owners remain optimistic about their prospects, cost pressures remain a top concern.
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Tuesday
Government debt glut could rock markets in 2025, BIS says
The Bank for International Settlements (BIS) has raised alarms over the growing risk that soaring government debt levels could destabilize financial markets. Claudio Borio, the head of BIS's monetary and economic department, warned of potential disruptions in bond markets that could spill into other asset classes. He stressed the need for policymakers to act proactively, even though markets have yet to see "bond vigilante" attacks, where investors drive up borrowing costs to force fiscal discipline.
Global sovereign debt is projected to rise significantly, with the Institute of International Finance estimating an increase of one-third by 2028, reaching nearly $130 trillion. The U.S. alone could see its debt swell by $8 trillion due to proposed tax cuts, while the UK's borrowing estimates have sharply increased under its new Labour government. Political and fiscal concerns in France and Japan have also resurfaced.
In response to bearish sentiment on U.S. government debt, bond fund PIMCO plans to diversify its investments abroad. Meanwhile, the yield on the U.S. 10-year Treasury has risen by 56 basis points since September, reflecting growing pressures in the Treasury market, where dealers hold record levels of unsold debt.
The BIS highlighted broader concerns about global interest rate uncertainty and increased currency market volatility, which have dissuaded traders from re-entering positions after recent market disruptions. Despite these challenges, the global economy remains resilient, bolstered by robust U.S. growth.
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Wednesday
A top EM trade turns into ‘catastrophe’ as Brazil rates surge
What began as a highly recommended trade by major Wall Street firms has turned into a significant misstep in Brazil's financial markets. Morgan Stanley, Bank of America, JPMorgan, and Barclays urged clients to invest in "receiver" positions, betting on lower interest rates in Brazil due to expectations of global monetary easing and Brazil's high real rates. However, the strategy backfired as Brazil's swaps curve diverged sharply from other markets, with 2026 contracts spiking over 470 basis points year-to-date, unlike declines in Mexico and Chile.
The selloff was driven largely by Brazilian hedge funds, which doubted President Luiz Inácio Lula da Silva’s commitment to fiscal discipline amid a growing budget deficit. In June, traders reversed bets on rate cuts and began pricing in hikes. The situation worsened when Lula added tax exemptions to a long-awaited fiscal package, undermining expected savings and reinforcing fears about his lack of fiscal austerity. This triggered a surge in rates and a record low for the Brazilian real.
Now, traders anticipate aggressive rate hikes, with a 100 basis-point increase likely at the next central bank meeting. Foreign investors remain cautious, awaiting stability in the volatile market, compounded by uncertainty around Lula's health following emergency brain surgery.
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Thursday
ECB prepared for quarter-point rate cuts at next two meetings
European Central Bank (ECB) policymakers are expected to lower interest rates by a quarter point in January and possibly again in March, as inflation stabilizes at the 2% target and economic growth remains sluggish. This gradual approach is preferred, as it aligns with current economic expectations. Although a larger, half-point cut is still an option in emergencies, it could signal unnecessary urgency.
No final decision has been made, with ongoing assessments at each meeting, potentially influenced by developments in U.S. policies after Donald Trump's return to office. The gradual pace of rate cuts aims to address both inflation concerns and economic weakness. Following a fourth rate cut in December, the ECB may continue reducing rates through June, with markets anticipating a more aggressive approach.
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Friday
Emerging currencies post second weekly loss ahead of Fed meeting
Emerging-market (EM) currencies in Asia and the South African rand weakened, with the Thai baht, Indonesian rupiah, and rand leading losses. This decline was driven by investor disappointment with China's lack of detailed fiscal stimulus measures following its Central Economic Work Conference. While Chinese policymakers pledged to boost consumption, their reliance on monetary policy dampened sentiment. China's 10-year yields hit a fresh low, and Chinese equities fell, dragging EM indices lower, including a 0.5% drop in the MSCI EM equity index.
The broader market pessimism was further influenced by renewed strength in the US dollar and stock markets since Donald Trump’s election, alongside concerns over potential new US trade tariffs. The rupiah also weakened as Bank Indonesia intervened to support its currency, and South Korea’s won fell ahead of a domestic impeachment vote.
Despite challenges, there was a bright spot for EM stocks, which saw $3.4 billion in inflows for the second consecutive week, contrasting with $1.1 billion in debt outflows, as per EPFR Global data. However, concerns remain that a significant depreciation of the Chinese yuan could further pressure EM currencies and markets.
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