Insights


Monthly Cash Review - GBP GBP Liquidity LVNAV Fund, October 2022



UK financial markets started the month under a fiscal cloud following the “mini-budget” and the Energy Price Guarantee. With gilt yields rising, the Bank of England intervened in the market buying gilts and providing a collateral repo facility to ease market pressures. Political pressure grew and the uncertainty around the fiscal position resulted in another month of change: Chancellor Kwasi Kwarteng was replaced with Jeremy Hunt; most of the mini budget was reversed; a shorter term was set for the Energy Price Guarantee. Furthermore, Prime Minister Liz Truss resigned after just 44 days, with Rishi Sunak replacing her and ushering in a change in fiscal stance. The first task was to try to reassure the financial markets that the government does have fiscal responsibility. Chancellor Hunt has also indicated that further expenditure restraint and/or tax increases might be required. Initially, the Chancellor’s Medium-Term Fiscal Plan was brought forward to 31 October, but with the change in Chancellor and PM, it has been moved back to 17 November. The focus at the end of the month shifted to the Bank of England Monetary Policy Committee meeting on 3 November.

Policy

There was no Bank of England Monetary Policy Committee meeting in October.

Outlook

Market sentiment improved during the month following the fiscal policy U-turn, the appointment of a new Chancellor and the announcement of new PM, Rishi Sunak. Yields moved lower across the curve. Domestic inflationary pressures continue to grow. The 27% increase in utility prices on 1 October and again in April 2023 will push inflation back over 10%. This has reduced fiscal uncertainty, while pushing the cost back onto households. The labour market remains tight with wage expectations rising. The focus is on the next MPC meeting on 3 November where the implied rate has fallen from 3.4% at the start of the month to 2.9% at the end. Deputy BoE Governor Ben Broadbent had suggested that the market had gotten carried away by the fiscal shock and that a 50bps rate hike might be appropriate. The MPC may have preferred to wait for news on the path of fiscal policy in the Chancellor’s Autumn Statement on 17 November, but inflationary pressures remain strong. The Bank Rate is now expected to peak at 4.8%, rather than the 5.7% seen earlier in the month.

Source: Bloomberg Finance LP as of 31 October 2022

Fund

October was an extraordinary month for UK markets. In view of these circumstances, all holdings were kept extremely short in duration with the vast majority of trades placed within a one-week period. The weighted average maturity (WAM) was managed lower, averaging around 20 days over the period. The weighted average life (WAL) was unchanged around a mid-30-day duration.

The fund assets under management (AUM) exceeded £5 billion throughout the month. Fund liquidity requirements, both overnight and weekly, were well in excess of minimum requirements at all times. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo, and bank deposits. The fund credit rating exceeded requirements at all times.

Source: Office for National Statistics and Bloomberg Finance as of 31 October 2022


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