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Stocks tumble as British pound collapses on recession fears

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The British pound has fallen to a 37-year low, while markets around the world have been broadly sold off following fears economies are now in recession.

The pound has hit an all-time low against the US dollar after the UK government passed a string of tax cuts aimed at stimulating the economy.

However, the markets did not react favourably.

Instead, they saw it as another sign the UK is in a recession.

As such, UK bond yields spiked, with a sense of panic about the UK fiscal outlook pushing the pound to a 37-year low.

According to AMP's chief economist Dr Shane Oliver, the market sees the tax cuts as inflationary.

"A large UK package of tax cuts for mainly high-income earners and companies (amounting to 1% of GDP) and deregulation may have some supply side merit but that takes a long time to pay off and with the economy lacking spare capacity just risks adding to inflation and pressure on the BoE to hike by more," Oliver said.

How did markets react?

The market is now facing the possibility of high inflation and a recession.

Unsurprisingly, the latest tax cuts have sent shockwaves through an already jittery market.

US and UK shares which were sold off on Friday continued their rout and overnight the S&P500 fell by 1.03%.

Australia's stock market was unable to avoid the sell-off, falling by 1.6% during Monday's trading.

In forex markets, currency traders are shifting into the US Dollar, putting further pressure on the pound.

The US Dollar is a safe haven for investors, so you'll typically see the USD rise when economies starts to get a bit shaky while other currencies like the pound and AUD fall.

What's next for investors?

Despite the current turmoil, there are signs that world markets might have even reached peak inflation.

Dr Oliver said in an investor note "our Pipeline Inflation Indicator continues to slow suggesting that inflation will fall faster than the Fed is now expecting, inflation expectations outside of Europe have fallen and Canada has joined the US in showing signs of peak inflation."

The chief economist also highlights that over the medium term, shares are expected to grow

"Shares remain at high risk of further falls in the months ahead as central banks continue to tighten, uncertainty about recession remains high and geopolitical risks continue, Dr Oliver explains.

"However, we see shares providing reasonable returns on a 12-month horizon as valuations have improved, global growth ultimately picks up again and inflationary pressures ease through next year allowing central banks to ease up on the monetary policy brakes."

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