FTSE 100 bounces back from sharp early falls after Wall Street sell-off

Joe Biden’s stimulus package plans could lead to inflation

(AP)

The FTSE 100 staged a rapid bounceback from sharp early falls today as London reacted to fears of higher interest rates that triggered a big selloff on Wall Street last night.

US markets plunged after a surge in bond yields - the interest payable on government debt - as investors grew increasingly worried about the impact on inflation of the big stimulus packages being lined up President Joe Biden.

Inflation fears and the associated spike in bond yields tend to hit share prices because they indicate central banks will have to raise interest rates. That in turn means companies’ borrowing costs rise and profits fall.

Yields on government debt in Asia also leaped this morning, causing big falls in share prices there, albeit earlier blowouts in yields eased slightly during the session.

The FTSE 100 fell 53.06 to 6598 in the opening minutes, not as bad a tumble as the 1.3% fall futures markets had predicted earlier. But it rapidly recovered, bouncing around only 0.2% down as the morning progressed to be off just 11 points at 6641.

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The technology-laden Nasdaq share index had its biggest fall since October, falling 3.5% last night, while the S&P 500 fell 2.5%. Futures markets indicated a slight recovery was in store for the S&P when it opens this afternoon.

Germany’s Dax and France’s CAC 40 fell further than the FTSE in the opening minutes but, as with London’s shares, recovered their poise as the morning went on.

CMC analyst Michael Hewson said: “It is certainly true that after years of low or negative real rates, the possibility that real rates are now starting to move quite a bit higher is turning into a reality, and that is making some people nervous, given that more fiscal stimulus measures are coming from the new US administration.

“The problem is also to do with the speed of the rise. Let’s not forget US 10-year yeilds were at 0.913% at the end of last year, and are now trading around 1.5% - a move of 60 basis points in less than two months.”

He said this was blowing the “froth” off some highly valued shares.

UK shares could be hit further by leaks suggesting Chancellor Rishi Sunak is about to scrap his emergency loan schemes and replace them with a new, less generous one.

The three existing schemes, including the popular Bounce Back Loans for smaller companies, will end at the end of next March, the Financial Times reported. They will be replaced by new government-backed loans with interest rates of up to 15%. Bounce Back Loans are capped at just 2.5%.

More details will emerge in next week’s Budget, when Sunak will extend other Covid support packages until June, such as the business rates and VAT relief, the furlough scheme and the stamp duty holiday.

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