As many of you woke up this morning to learn of a newly instituted Bank Holiday, you will have quickly learnt about what took place since the early hours of this morning in the financial markets. Forensic Financial Investigators are busy attempting to identify the straw that effectively broke the camel’s back, but more apt may be the butterfly that flapped its wings in Asia that has led to a cascading of global liquidity. Based on what our initial investigations have unearthed, over the weekend, fears began to emerge in the highly indebted Japan as their markets opened, and bond yields began to rapidly climb. The knock-on-effect of this was a need for bond traders to quickly access liquidity in order to cover their leveraged positions, which led to a sell off in Japanese equities. Given the scale of the Japanese debt market, many traders exposed to this change in yields had been benefiting from the “Yen carry trade” (borrowing cheap Yen and buying higher yielding Dollars), also began to open pre-emptively sell orders within the US market before it opened.

This spike in demand for liquidity has then infected the only real time market available within the rest of the world, bitcoin. Since the Japanese market open, bitcoin has seen an over 40% drop, only being stopped by the long standing 200 week moving average that it momentarily dipped below. Although gold markets were not open, gold futures trading saw an unprecedented surge in volume and an expected 10% increase in spot price, even from its already elevated level. Following the period of historically low interest rates, since 2022, the rate of global savings has increased dramatically with views that the level of global debt was unsustainable. This was likely what contributed to the floor that was found in bitcoin, which has recovered by 10% from the lows and continues to climb. As markets began to open across Asia and Europe, policymakers have taken unprecedented steps to protect the system, by enacting pre-emptive circuit breaks by not opening and exposing bond markets to the wave of Asian initiated sell orders.

Irrespectively of whether models were technically opened, pre-marketing trading of the British Gilt market has seen the 10Y spike to over 9%, and wiping hundreds of billions of GBP off the LSE. With the British government currently holding debt of over 100% of GDP, with an existing 3% deficit, this spike has effectively increase borrowing costs to over 15% of GBP, and expanding the deficit to nearly 9% of GBP, only after the yield has returned back to 7%. Given the disfunction of the bond market, banks across the UK petitioned the treasury to instigate an emergency bank holiday, to prevent there being a run on the banks as savers attempt to withdraw their saving. In the short term, the UK treasury is determining their options for accessing capital necessary for the future sale of bonds, however, given the state of their finances, yields remain elevated with the likely crash in economic output likely decimating future tax revenue.

Following this unforeseeable event, to stabilise markets, government ministers have taken the innovative solution, following Cyprus’s precedence to “bail in” the banks for saver’s assets. The government have also applied an initiative similar to the BTFP programme initiated in the US in 2023, to cover the “to market” value of bonds held by the banks. Given the inability of the government to access finance from the market, following the removal of tax exemption of pensions from inheritance tax in 2024, 50% of private pensions over £100k have been nationalised, 75% of those over £300k and 100% of both cash and stock and shares ISA have also been nationalised. Locally domiciled gold e ETF holdings have been temporarily frozen, preventing all in kind redemption until further notice. As yet, there has been no announcement of the current status of monetary gold held in self-custody, although ministers are considering all options to return confidence to public finances. The government have, however, assured British citizens that they will be made whole with the GBP value of their assets at the time of nationalisation once market conditions allow.

Supporting this enforced access to internal liquidity, the Treasury has held an emergency meeting with the Bank of England Monetary Policy Committee, who agreed to reduce rates to 0.5% in order to manage debt interest expenditure. Moving forward, the Bank of England Governor also stated that at the request of the Chancellor, he would be restarting the policy of quantitative easing. This is a policy that was begin following the GFC to support the maintenance of a functioning bond market by the bank purchasing government bonds in an effort to reduce yield and then holding them on the Bank’s balance sheet. Although they have not gone so far as to state they would be explicitly aiming to control the yield curve, at this time, there is no upper limit to the value the Bank of England is prepared to hold to return yields to the pre-event level of around 4.5%. The Bank then stated there were no plans for how long these bonds would remain on their balance sheet.

Similar actions have taken place within the US, as they have prepared to weather the storm of market openings. Of particular note has been the exceptional move by President Trump to nationalise all the bitcoin ETFs and all assets held by third party custodians, stating national security reasons. The primary target of this move was the assets of MSTR, effectively bankrupting this entity in a single move. Interestingly, the announcement of this action resulted in a short live spike in the bitcoin price, but the continued need in the market for liquidity meant this could be viewed as a “dead cat bounce”, although continuing to hold the 200-week moving average due to strong buying pressure from those markets still functioning. During this period, Coinbase saw an extreme spike in requested withdraws, until shortly after, servers crashed, later the ability to purchase bitcoin was disabled. While non-bitcoin assets are yet to be seized, the government has also instituted a bank holiday, in an effort to allow the financial system time to maintain operational stability.

Although still early in this new era of this “global, sovereign debt crisis”, individuals have quickly begun to adapt to this new, if only temporary world. What has been particularly unusual is that due to the banks being unable to process payments, payment processors such as Visa and Mastercard have also been shutdown due to concerns that balances would not be available to settling any pending transaction. Initial details report that even with the enforced bank holiday, some independent retailers are continuing to operate, in what has already begun to be known as the financial “dark ages”, due to the lack of electronic payments. Within these retailers, individuals have resorted to cash only payments, with the exact exchange rates often being determined by the availability of physical money within particular regions. Other retailers with established customer bases have quickly begun to establish ad-hoc credit ledger systems to record sales until a time when electronic payments systems are operating. There have already been reports of social unrest and price inflation of commodity items, such as eggs, steak and petrol, while supply remains.

The volatility of global markets is beginning to reduce after the dramatic shocks associated with the market opening, however, the currency markets remain unsettled. While US bond markets, although operating at evaluated levels, continue to function, as global traders are looking for reserve assets outside their local currencies, although these are primarily short duration bonds. However, following the shock in the Asian markets, it currently takes over 200 Yen to purchase a single dollar, dropping nearly 30% in a matter of hours trading as faith appeared to be lost. More worrying for British readers, during morning trading GBP has fallen below the $1.03 low of the “mini budget” debacle of 2022, and briefly dipped below parity. Of note has been a spike in search traffic for bitcoin in the UK, although due to the limited availability of bitcoin related services, and barriers of transferring money to bitcoin exchanges, there has been a limited impact on purchase volumes in the UK.

At this time, the future is uncertain within the financial markets, although the government has assured citizens there will be a strong need for them to centralised savings, and provide access through their recently developed digital wallet. Although there is currently no timeframe for when the banking system will again be operational, the government suggest that their new digital pound will begin to appear in government approved wallets by the end of the week. When combined with the government’s action force oriented towards the functioning of the food distribution network, they have begun to nationalisedfarms and supermarkets, while there may be some short-term disturbances in the availability of certain types of food, there is strong assurance that supermarkets will not be able to capitalise on this financial dislocation. A government spokesman was adamant that they had done only what was necessary and was done for the good of everyone, in the publics’ best interests. He also stated that all benefits, state pensions, public sector staff and public sector pension payments will continue as normal, being drawn from currency reserves held with the bank and sent (and back dated) once digital payments systems are operational. Finally, the spokesman assured citizens that any supply disruption would be short lived and the utmost importance to not purchase more of anything than required to prevent demand spikes, price surges or shortages.

But today, this hasn’t happened, those in power have been able to avert the inevitable for another week, another month, but I doubt many more years. Don’t sweat it, but also don’t wait to prepare, prepare and then wait, as people scrabble for assets “it might sense to get some, just in case”.