Yahoo Finance FTSE closes in the red as bond yields creep up despite Bank of England measures
European shares closed mixed on Monday as investors grapple to understand competing data about where the economy is headed, and what that might mean for the Bank of England's efforts to cool inflation.
In London, the FTSE 100 (^FTSE) fell 0.3% to 6,973 points and the FTSE 250 (^FTMC) index of mid-sized firms slipped 1.2% after the closing bell.
France’s CAC (^FCHI) slid 0.3% on the day and the DAX (^GDAXI) was up 0.2% in Germany.
"October’s early optimism has evaporated and pessimistic sentiment has returned about the after-effects on the global economy of the big offensive on inflation," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
The cost of long-term borrowing in the UK for the government surged to its highest level since the Bank of England (BoE) launched its £65bn bond-buying programme.
Yields on 30-year gilts rose above 4.5% — the highest level since jumping over 5% just before the Bank’s intervention on 28 September. 10-year gilt yields also pushed up by 2.5 basis points to 4.25%.
Read more: Bank of England: What will the emergency action actually do?
The jump has caused concern as analysts warn that further market turmoil could be on the cards.
"The suspicion is that risk reduction by pension funds has been too limited so far," Antoine Bouvet, senior rates strategist at ING said. "The question is do they have enough cash to meet new collateral requirements if the gilt market sells off again, as the gilt purchases by the Bank of England end this week."
"I think the fear is that the answer's no and that it will trigger the same snowball effect that we had two weeks ago."
Threadneedle Street has tried to calm markets after a pension-fund strategy that aimed to reduce volatility without lowering returns came unstuck, in the wake of a rapid rise in bond yields.
While the central bank's intervention initially helped settle bond markets, and brought yields back down, yields have since risen in recent days as the Bank has held off on using most of its firepower.
But on Monday it offered to buy long-dated UK government bonds in larger amounts, adding that it would provide continuing support to pension funds that have been at the heart of the bond market crisis.
It will now buy up to £10bn of government bonds a day — double the previous limit of £5bn.
Meanwhile, Kwasi Kwarteng will attend the annual meeting of the International Monetary Fund (IMF) and the World Bank on Monday.
The world lender criticised the annual £43bn ($48bn) stimulus package that triggered last month’s rout in UK assets, in a highly unusual criticism of a G7 economy. The IMF questioned why the UK chancellor would add fuel to an economy at a time when the Threadneedle Street is trying to bring back inflation from near a 40-year high to its 2% target.
Read more: Kwasi Kwarteng to publish fiscal plan and OBR forecasts on 31 October
"We do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy," the IMF warned
But the finance minister has heeded one of the fund's key warnings by scrapping plans to abolish the 45p income tax rate for the highest earners after the IMF lambasted the move for stoking inequality.
The pound (GBPUSD=X) lost ground despite the BoE doubling its bond-buying programme to £10bn a day.
Sterling was trading at $1.10 against the dollar in noon trade, and at €1.14 against the euro (GBPEUR=X).
Across the pond, Wall Street indices pushed lower after a volatile week that has catapulted bets on higher interest rate rises from the Fed. This week also sees third-quarter earnings season kick off.
"The likelihood of a further 0.75% interest rate hike in November is all but nailed on in terms of market consensus after the non-farm payrolls figure revealed a labour market which is still strengthening," Richard Hunter, head of markets at Interactive Investor said.
The benchmark S&P 500 (^GSPC) lost 0.9%, the tech-heavy Nasdaq (^IXIC) tumbled 1.3%, while the Dow Jones (^DJI) slipped 0.4% at London's close.
Read more: Interest rate rises only way to tame UK inflation, warns Bank of England deputy governor
Chris Beauchamp, chief market analyst at online trading platform IG, said: "The impact of Friday’s payroll report and its implications for Fed policy and the economic outlook continue to loom large over markets.
"While Friday’s knee-jerk move was perhaps an overreaction in the near-term, the overall outlook remains highly unfavourable to equities."
Asian stocks finished broadly lower overnight as holidays in Japan and South Korea made for thin trading.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 1.4%. Nikkei futures (NIY=F) traded 0.5% lower at 26,575 compared to Friday's cash close of 27,116.
In Hong Kong, the Hang Seng (^HSI) crashed 3% after the closing bell, while the Shanghai Composite (000001.SS) declined 1.7% in mainland China after being closed for a week due to a holiday.
