Europe edges higher as UK U-turns settle nerves

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By Marc Jones and Wayne Cole

LONDON/SYDNEY (Reuters) - Europe's share, bond and currency markets moved tentatively higher on Monday, helped by relief that's Britain new finance minister had quickly ripped into the unfunded tax cuts that triggered turmoil in UK assets this month.

Asia's main markets had struggled overnight but Europe's STOXX 600 made a 0.5% early gain as both the pound and UK government bonds rallied in London. [.EU][/GB][/FRX]

Britain's new finance minister Jeremy Hunt is due to make a statement at around 1000 GMT. He spent much of the weekend holding meetings and doing media interviews signalling that many of the spending plans of Prime Minister Liz Truss and his predecessor, would now be scrapped.

Bank of England Governor Bailey gave Hunt a vote of confidence on Saturday, saying they had an "immediate meeting of minds" on the need to fix the public finances, where there are estimates of a 70 billion pound ($78.72 billion) black hole.

Invesco's director of macro research Ben Jones said the UK's volatility would remain a key focus for global markets.

"The hope is that Jeremy Hunt is a more stable set of hands," he said, pointing to the "relief rally" for the pound which was up 0.75% at $1.1257, and in the UK gilt markets. [GB/]

"But we still need to see some follow through... and we still don't know whether Liz Truss will still be there at lunchtime or the end of the month".

Yields in British 10-year gilts fell 27 bps to 4.06% in morning trading, while the 2-year dropped 12 bps to 3.75%..

Other European markets benefited too. The German 10-year Bund yield was down 9 basis points (bps) to 2.27% having hit 2.423% last week, its highest since August 2011.

That was also despite two key ECB policymakers making the case over the weekend for cutting the bank's balance sheet and after U.S. inflation data on Friday had bolstered bets on another aggressive rate hike from the Federal Reserve.

ROTATING

Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.6% and back toward last week's 2-1/2 year low.

Japan's Nikkei shed 1.2% although Chinese blue chips rose 0.4% ahead of GDP data due on Tuesday.

S&P 500 futures edged up 0.4% after Friday's sharp retreat, while Nasdaq futures added 0.3%.

While the S&P is an eye-watering 25% off its peak, BofA economist Jared Woodard warned the slide was not over given the world was transitioning from two decades of 2% inflation to a time of something more like 5% inflation.

"$70 trillion of 'new' tech, growth, and government bond assets priced for a 2% world are vulnerable to these secular shifts as 'old' industries like energy and materials surge, reversing decades of under-investment," he wrote in a note.

"Rotating out of 60/40 proxies and buying what is scarce - power, food, energy - is the best way for investors to diversify."

INTERVENTION WATCH

A red-hot U.S. consumer price report and rising inflation expectations have markets fully expecting the Federal Reserve to hike rates by 75 basis points next month, and likely by the same again in December.

A host of Fed policymakers are speaking this week, so there will be plenty of opportunity for hawkish headlines. The earnings season also continues with Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX) and Johnson & Johnson (NYSE:JNJ) reporting, among others.

Goldman Sachs (NYSE:GS) also reports this week and the Wall Street Journal reported the investment bank plans to restructure its biggest businesses into three divisions.

In China, the Communist Party Congress is expected to grant a third term to President Xi Jinping, while there could be a reshuffle of top economic roles as incumbents are near retirement age or term-limits.

"Investors haven't fully digested that China isn't going to be a high growth economy any more," said Janus Henderson Emerging Markets Portfolio Manager Ales Koutny who also expects the yuan to keep falling. "It is not going to be 5%-6% growth a year, it's going to be 2%-3%."

In currency markets, the dollar remains king as investors price in U.S. rates peaking around 5%.

The yen has been particularly hard hit as the Bank of Japan sticks to its super-easy policy, while authorities refrained from intervention last week even as the dollar sped past the 148.00 level to 32-year peaks.

Early on Monday, the dollar was up at 148.73 yen and heading for the next target at 150.00.

The euro was holding at $0.9733, having put in a steadier performance last week, while the U.S. dollar index eased a fraction to 113.20.

The rise of the dollar and global bond yields have been a drag for gold, which was stuck at $1,648 an ounce. [GOL/]

Oil prices were trying to bounce, after sinking more than 6% last week as fears of a demand slowdown outweighed OPEC's plans to cut output. [O/R]

Brent firmed 90 cents to $92.55 a barrel, while U.S. crude rose 84 cents to $86.45 per barrel.

($1 = 0.8892 pounds)