London stocks climb on the last day of tumultuous quarter

By Johann M Cherian and Susan Mathew

(Reuters) -UK’s mid-cap stocks jumped on Friday, with beaten-down sentiment getting a small lift from data that showed the British economy performed better than expected in the second quarter, though traders remained cautious.

London’s blue-chips FTSE 100 index edged 0.2% higher thanks to a comeback in hammered bank stocks, which rose 0.6%.

After losing more than 10% over the last six sessions, the domestically focussed FTSE 250 index surged 2.3% despite a 21.3% plunge in cruise operator Carnival PLC after it forecast a loss for the fourth quarter amid rising costs.

Holiday group TUI dropped 10.1%.

The Office for National Statistics said economic output in Britain unexpectedly rose by 0.2% in April through June, revised upward from a previous reading of a 0.1% contraction, but remained below its pre-pandemic peak.

“The real test is yet to come. The full extent of sky-high inflation and now increased borrowing costs will only begin to be truly felt in the second half of the year,” Danni Hewson, financial analyst at AJ Bell, said.

“Even with the government’s energy support package, many households will see their bills shoot up, leaving them less cash to pay for any of those discretionary goods and services that help UK PLC soar.”

On the quarter, the FTSE 100 fell 3.8%, extending declines to a second straight quarter amid fears of a hit to economic growth from tighter monetary policy to curb surging inflation.

Some hefty declines came in the last week after the government unveiled a ‘mini-budget’ which proposed unfunded tax cuts. The subsequent sell-off in gilts forced the Bank of England to step in with emergency bond buying measures to calm the markets, helping the pound off record lows.[GB/] [GBP/]

Joules Group surged 26.0% on Friday as the struggling British fashion retailer said that its turnaround plan was making good progress.

(Reporting by Johann M Cherian in Bengaluru; Editing by Anil D’Silva, Neha Arora and Andrew Heavens)

London stocks dive on fiscal policy nerves

By Johann M Cherian and Susan Mathew

(Reuters) -London stocks sank on broad-based losses on Thursday, with the mid-caps index plunging 3.1%, as worries about fallout from the government’s new economic plan continued to roil markets.

Relief from emergency bond-buying measures by the Bank of England on Wednesday proved brief as UK bond yields resumed their rise, as did the sterling. [GB/][GBP/]

Consumer discretionary stocks led losses in the mid-caps index which tumbled to May 2020 lows. The index is on course for its worst week since March, down 6.6%.

The blue-chips index lost 1.8% as banks and consumer staples weighed. It is set for its third straight weekly fall.

Britain’s Prime Minister Liz Truss defended her tax-cutting budget on Thursday despite criticisms from rating agency Moody’s, the International Monetary Fund and turmoil in markets.

Stock markets have been hit globally this year amid worries that aggressive monetary policy tightening to curb inflation could tip economies into recession. The FTSE 100 has lost 7% so far in 2022.

“The zero or very low interest rate environment for the past 15 years has hidden or concealed some of the fragilities of the financial system, and in fact it has encouraged a lot of risk taking. And now all of those vulnerabilities are coming to the fore,” Andrea Cicione, head of strategy at TS Lombard, said.

“This is just one example of leverage in the financial system in places where we weren’t aware there was … Leverage is always there and it’s very difficult to see until things start to go wrong.”

Data on Thursday showed Britain’s consumer confidence sank to a record low this month, amid accelerating cost of living.

Shares of Next slid 12.2% after it cut profit and sales forecasts, while British American Tobacco fell 3.6% in ex-dividend trading.

Synthomer tanked 35% after it lowered annual profit outlook.

(Reporting by Johann M Cherian and Susan Mathew in Bengaluru; editing by Uttaresh.V, Rashmi Aich and Andrew Heavens)

The GBP/USD Is Back in the Red After the BoE Fueled Wednesday Rally

On Wednesday, the Bank of England stepped in to calm the markets and restore confidence in the Pound.

Tagged the ‘Gilt Market Operations,’ the BoE released details of the Bank’s purchases of longer-dated UK government bonds.

According to the announcement,

“The Bank will carry out purchases of long-dated gilts in a temporary and targeted way. The purpose of these purchases is to restore orderly market conditions.”

The Bank added,

“Given current market conditions, the Bank stands ready to purchase conventional gilts with a residual maturity of more than 20 years in the secondary market, initially at a rate of up to £5 billion per auction. These parameters will be kept under review in light of prevailing market conditions.”

The first auction took place on Wednesday, and subsequent auctions will happen daily until October 14, 2022.

Market Reaction to the BoE Intervention Was Ultimately Bullish

On Wednesday, the GBP/USD pair rallied by 1.45% to end the session at $1.08879. The Pound had tumbled to a low of $1.05381 before surging to a day high of $1.09160. However, this morning, the GBP/USD pair was on the back foot early in the Asian session, falling by 0.33% to $1.08520.

GBP/USD under pressure after Wednesday relief rally.
290922 GBPUSD Daily Chart

While the purchase of longer-dated gilts delivered order, market concerns over the UK Government’s mini-budget and the implications to inflation and monetary policy remain. On Tuesday, BoE Chief Economist Huw Pill said that the BoE would wait until the November MPC meeting to deliver a policy response to the mini-budget.

However, market disorder forced the Bank into action.

Beyond the Pound, market reaction to the Bank of England intervention was evident across the asset classes.

On Wednesday, the NASDAQ 100 rallied by 2.05%, with the Dow and the S&P500 ending the day with gains of 1.88% and 1.97%, respectively. The US futures had been in negative territory through the European session before the market response to the BoE move.

The European markets also bounced back from heavy losses, with the DAX30 rising by 0.36% and the FTSE100 ending the day up 0.30%. However, the gains were modest, with recession jitters and hawkish Fed chatter pegging the majors back on the day.

Elsewhere, the crypto market recoupled with the US equity markets. The crypto market had briefly decoupled in response to the Fed’s rate hike and FOMC projections.

Crypto - NASDAQ correlation
Total Market Cap – NASDAQ – 290922 5 Minute Chart

Recovering from an early morning slide to a Wednesday low of $865.4 billion, the crypto market cap is currently up $14.1 billion to $910.0 billion.

Early in the Wednesday session, news of Apple Inc. (AAPL) pulling plans to ramp up production of the new iPhone 14 product suite had sent riskier assets into the deep red.

Looking at the Asian markets this morning, the risk-on sentiment from the US session has failed to provide support. At the time of writing, the ASX200 was down 0.53%, with the NASDAQ 100 Mini down 16 points.

The Bank of England will need to do more to restore confidence in the Pound. Hawkish central bank chatter will also remain a headwind for riskier assets. Warnings from the likes of Apple Inc of weakening demand will continue to add to the market angst.

Wall Street bounces off lows as UK steps in to calm bonds

By Lawrence Delevingne

(Reuters) -Global equities staged a partial comeback on Wednesday — with Wall Street stocks surging around 2% — as the Bank of England said it would step in to the bond market in an attempt to dampen investors’ fears of contagion across the financial system.

The BoE said it would temporarily buy long-dated bonds – linked most closely to workers’ pensions and home loans – in light of a surge in UK bond yields and related borrowing costs.

Sterling, which hit record lows against the dollar on Monday, was last up about 1.4% in volatile trading, while gilt prices roared higher. European government bonds also got a lift from the surge in gilts.

Investors have been rattled in the last week in particular by soaring bond yields, as central bankers have raced to raise interest rates to contain red-hot inflation before it tips the global economy into recession.

The dollar, the ultimate safe-haven in times of market turmoil, was down about 1.2%, easing from two-decade highs spurred on by yields on the benchmark 10-year Treasury approaching 4.0% for the first time since 2008. Yields on other U.S. government bonds also declined on Wednesday.

The MSCI All-World index was last up about 1.3%, having pulled off a session trough that marked its lowest level since November 2020. It is still heading for a more than 7% drop in September – its biggest monthly decline since March 2020’s fall of 13%.

In Europe, the STOXX 600 and FTSE 100 both pared losses to finish up about 0.3%.

Wall Street’s rebound gained momentum over the day, with the S&P 500 Index up about 2% after it fell to a two year low on Tuesday. The Dow Jones Industrial Average also gained 1.9% and the Nasdaq Composite was up about 2%.

Weighing on growth stocks was Apple Inc, which was down about 1.3% on a report the tech company was dropping its plans to boost production of the latest model of its flagship iPhone.

Bryce Doty, senior portfolio manager for Sit Fixed Income Advisors LLC in Minneapolis, said the UK intervention had helped calm U.S. markets, but that the “temporary stability is something of an illusion.”

Doty cited the widening gap between 10-year treasury yields and 30-year mortgage rates, which he attributed to the Fed reducing its mortgage securities and the sharp inversion of the yield curve resulting from the Fed’s “aggressive determination to damage economic activity.”

UK MARKETS STORM

At the heart of earlier sell-off across global markets was the British government’s so-called mini-budget last week which announced a raft of tax cuts and little in the way of detail as to how those would be funded.

The International Monetary Fund and ratings agency Moody’s criticised Britain’s new economic strategy announced on Friday, which has sparked a collapse in the value of British assets.

Strategists at Amundi, Europe’s largest asset manager, said earlier on Wednesday they believed UK assets were in for more losses, as the UK’s fiscal credibility remained on the line.

“We believe risks remain tilted to the downside – given how much is already priced-in, less aggressive signalling from the BoE will accelerate the move to below parity (for sterling/dollar), in our view,” strategists led by Laurent Crosnier, global head of FX, wrote, recommending investors avoid pounds.

Oil prices jumped higher on Wednesday for a second day, rebounding from recent losses as the U.S. dollar eased off recent gains and U.S. fuel inventory figures showed larger-than-expected drawdowns and a rebound in consumer demand. U.S. crude rose 4.5% to $82.06 per barrel and Brent was at $89.22, up 3.4% on the day.

Spot gold added 2.0% to $1,660.79 an ounce. U.S. gold futures gained 2.04% to $1,659.70 an ounce.

Scott Wren, senior global market strategist at Wells Fargo Investment Institute, said markets may already be pricing in future pain.

“Should the economy slow and eventually fall into recession and inflation stays higher for longer, we believe financial asset prices have adjusted to reflect this likely reality,” Wren wrote in a client note released on Wednesday. “Eventually, brighter skies will be on the horizon.”

(Reporting by Lawrence Delevingne in Boston and Amanada Cooper in London; Additional reporting by Wayne Cole in Sydney; Editing by Matthew Lewis and Alistair Bell)

European shares reverse losses as BoE intervenes to cool bond markets

By Devik Jain and Amruta Khandekar

(Reuters) – European shares gained on Wednesday, with the UK’s blue-chip index reversing losses after the Bank of England said it would purchase bonds to cool a turmoil in markets stemming from the British government’s fiscal plans.

The continent-wide STOXX 600 index was up 0.3% after falling nearly 2% earlier in the session as an intensifying energy crisis in the region and the relentless surge in global bond yields fuelled worries about a recession.

The BoE said it would buy as many long-dated government bonds as needed between now and Oct. 14 to stabilise financial markets, adding that it would postpone next week’s start of its gilt sale programme.[.L]

The pound rose and UK gilt prices rocketed. London’s FTSE 100 closed up 0.3% after falling as much as 2%.[.L]

“I don’t think the markets view this as an all clear. They view this as very necessary first aid,” said Steve Sosnick, chief strategist at Interactive Brokers.

The BoE move came after the International Monetary Fund and ratings agency Moody’s ramped up pressure on Britain to reverse a new economic strategy revealed last week which proposed unfunded tax cuts, prompting a surge in bond yields and a searing drop in the pound.

“We’re still going to have to see over the coming days and weeks whether this was a temporary measure. We’re going to have to see if the UK government backs off its fiscal plans after the disastrous response that they received in the marketplace,” Sosnick said.

Euro zone borrowing costs fell, reversing an earlier rise to multi-year highs.

Heightening jitters about rising interest rates hitting economic growth, the European Central Bank may need to hike rates by another 75 basis points at its October meeting and move again in December to a level that no longer stimulates the economy, policymakers said on Wednesday.

The ECB lifted interest rates by a combined 125 basis points at its past two meetings.

On the STOXX 600, energy, healthcare and miners rose between 0.4% and 2% but were countered by a sharp fall in bank stocks and consumer staples.

Meanwhile, geopolitical tensions intensified as Europe investigated what Germany, Denmark and Sweden said were attacks on two Nord Stream pipelines at the centre of an energy standoff.

Shares of fish farmers such as Mowi, Leroy Seafood and SalMar dropped between 18% and 30% after the Norwegian government proposed a resource tax on salmon and trout farming of 40% from the tax year 2023.

(Reporting by Devik Jain, Amruta Khandekar and Susan Mathew in Bengaluru and Dhara Ranasinghe in London; Editing by Subhranshu Sahu, Savio D’Souza, Vinay Dwivedi and Jonathan Oatis)

London’s FTSE 100 rises as Bank of England steps in to stabilise markets

By Johann M Cherian, Bansari Mayur Kamdar and Susan Mathew

(Reuters) -London’s blue-chip FTSE index erased steep session losses to close higher on Wednesday, while the mid-cap index cut all of its bruising 3% plunge after the Bank of England’s promise of bond purchases lifted sentiment.

The BoE said it would buy as many long-dated government bonds as needed between now and Oct. 14 to stabilise financial markets, adding that it would postpone the planned start of its gilt sale programme. UK gilt prices soared. [GB/]

The move came after the pound sank to record lows earlier this week in the wake of Britain UK’s new economic strategy. On Wednesday, the International Monetary Fund censured the plan while rating agency Moody’s warned large unfunded tax cuts were “credit negative” for Britain.[GBP/]

“This shows that the Bank is going to do all it can to prevent a financial crisis and it is already working,” said Paul Dales, chief UK economist at Capital Economics.

The blue-chip index rose 0.3% after dropping as much as 2.1% to six-month lows earlier in the session. The more domestically focused FTSE 250 closed down flat, recovering from two-year lows.

As copper prices recovered, miners were the biggest boost to the FTSE 100, followed by healthcare and energy stocks. [MET/L] [O/R]

Markets globally took heart with euro zone shares rising 0.3%, while U.S. stocks rallied after a dizzying sell-off over the past few weeks. [.N]

Stock markets have been hit globally this year amid worries that aggressive monetary policy tightening to curb stubbornly high inflation could tip economies into recession. The FTSE 100 has lost 5% so far this year.

“The fact that it needed to be done in the first place shows that the UK markets are in a perilous position. It wouldn’t be a huge surprise if another problem in the financial markets popped up before long,” Dales said.

“Either way, the downside risks to economic growth are growing. And the Chancellor’s 2.5% real GDP growth target is looking even more unachievable.”

Weighing on the index, rate-sensitive banking stocks declined 2.5%. [GB/]

Among individual stocks, Burberry Group rose 5.0% after announcing Daniel Lee would be its new chief creative officer.

(Reporting by Susan Mathew, Johann M Cherian and Bansari Mayur Kamdar in Bengaluru; Editing by Uttaresh.V, Savio D’Souza, Shounak Dasgupta and Mark Heinrich)

Sterling pares losses against dollar as BOE resumes bond purchases

By Harry Robertson

LONDON (Reuters) -Sterling regained ground against the dollar in volatile trading on Wednesday after the Bank of England (BOE) said it would step in to calm the turbulence in the UK government bond market.

The pound fell as much as 1.74% after the BOE’s announcement but clawed its way back into the green to stand 0.2% higher at $1.0737 in late London trading.

The euro was up 0.4% against the pound at 89.71 pence after paring earlier gains.

UK assets have tumbled in recent days after new Finance Minister Kwasi Kwarteng on Friday announced a swathe of tax cuts to be funded by borrowing. The pound, which is down more than 20% this year, dropped to a record low of $1.0327 on Monday.

Stress has been most apparent in government bond markets, where prices have tumbled and yields have surged.

The BOE decided it had to step in on Wednesday, saying it had seen “dysfunction” in the market for long-dated gilts and that it would buy up to 65 billion pounds worth of assets to rectify the situation.

Bond prices rallied sharply, with the yield on the benchmark 30-year gilt falling more than a percentage point.

Chris Turner, head of markets at ING, said a delayed positive reaction to the BOE’s intervention may have boosted the pound.

“Given that the sell-off in gilts since early August had been a big factor driving sterling weakness, today’s intervention will be welcomed by some,” he said.

The pound was aided by a reversal in the dollar on Wednesday, as US bond yields fell sharply along with those in the UK.

The dollar index was last down 0.42%. That undid earlier gains which had seen the currency hit new 20-year highs.

Despite the recovery in the pound, Turner said many investors will remain pessimistic and trading will stay febrile. The BOE’s move “effectively provides room for the government to continue with its aggressive fiscal programme”, he said.

The International Monetary Fund on Tuesday released a statement saying “we do not recommend large and untargeted fiscal packages” at the same time as monetary policy is being used to tackle high inflation. It suggested the UK government “reevaluate” its plans.

Ratings agency Moody’s also weighed in on Tuesday, saying the unfunded tax cuts were “credit negative” and likely to weigh on growth.

Strategists at Barclays cautioned that any respite for the pound might not last long, with storm clouds still hanging over the UK economy.

“The currency is likely to be the easiest ‘release valve’ as investors come to terms with recent policy actions,” they said in a note to clients on Wednesday.

(Reporting by Harry Robertson; Editing by Amanda Cooper, Frank Jack Daniel, Catherine Evans and Ed Osmond)

London stocks slide amid economic “tug-of-war”

By Johann M Cherian

(Reuters) -UK’s FTSE 100 tumbled on Wednesday, dragged by banks, oil majors and mining stocks, while sentiment was further dented as two major global organisations strongly criticised the government’s tax cuts.

The blue-chip index dropped 1.6%, while the more domestically oriented FTSE 250 shed 2.5%.

The energy and mining sectors slid 1.4% and 1.1%, respectively, as a strengthening dollar weighed on metal prices, while crude prices were further hurt by supply cuts due to Hurricane Ian. [O/R] [MET/L]

Rate-sensitive banking stocks declined 4% after the Bank of England said it would undertake ‘significant’ policy moves only in November in light of the market turmoil, according to analysts.

The International Monetary Fund (IMF) and ratings agency Moody’s criticised Britain’s new economic strategy, with the latter warning that unfunded UK tax cuts would be “negative” for the country’s credit standing.

“There is an economic tug-o-war taking place between the Bank of England and the government,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

“The IMF criticism is based on the possibility that the actions by the government will fuel inequality within the UK on worries that UK is fast taking on the characteristics of an emerging market economy.”

Retailers slid 3.3%, with online fashion retailer Boohoo slumping 9.2% to its lowest in 7 years after it cut its full-year outlook, blaming a worsening macro-economic and consumer backdrop.

“Even before the recent drop in sterling will start to make imports more expensive for customers, they are already starting to tighten their belts and that is going to take a toll on retailers going forward”, Streeter added.

Burberry Group rose 4.1% after announcing Daniel Lee would be its new chief creative officer, replacing Riccardo Tisci, who is stepping down.

(Reporting by Johann M Cherian in Bengaluru; editing by Uttaresh.V and Savio D’Souza)

London stocks knocked by rate rise worries

By Johann M Cherian and Susan Mathew

(Reuters) -London stocks fell on Tuesday as worries about potential central bank tightening to support a hammered pound knocked risk appetite, with the mid-cap index dropping 2.4% in its fourth straight session of declines.

The BoE is likely to deliver a “significant policy response” to last week’s announcement of sweeping tax cuts by finance minister Kwasi Kwarteng but it should wait until its next meeting in November before making its move, BoE Chief Economist Huw Pill said on Tuesday.

After the pound fell to record lows on Monday, expectations had risen about an emergency intervention from the central bank.

As the pound recovered, the blue-chip FTSE 100 slipped 0.5%, while the domestically focused midcap index FTSE 250 hit its lowest since November 2020.

Energy and mining stocks advanced, tracking oil and metal prices higher, but they were offset by losses in bank and defensive stocks. [MET/L]

“The FTSE 250 index is obviously suffering as it is exposed to the domestic economy. You’re seeing stocks that make their money in sterling at home suffer on rising interest rate scenario,” said Keith Temperton, sales trader at Forte Securities.

“I don’t expect an emergency hike by the BoE unless sterling (continues to) have a massive downshift.”

“It’s very difficult to tame inflation when you’ve got a government that wants to go and spend money and cut taxes,” he said pointing to a steeper inversion curve in UK bond markets signalling long term inflation problems.

Biffa Plc surged 27.8% after the waste management company agreed to be taken over by private equity firm Energy Capital Partners in a 1.3-billion-pound ($1.41 billion) deal.

Burberry Group gained 1.7% after rating agency Moody’s changed its outlook on the company to “positive” from “stable”.

Saga Plc plunged 24.1% after it cut its full-year profit forecast and reported a first-half loss.

(Reporting by Johann M Cherian in Bengaluru; Editing by Subhranshu Sahu, Saumyadeb Chakrabarty and Alison Williams)

Bank of England ‘will not hesitate’ to act as it monitors market turmoil

By Amanda Cooper, David Milliken and Andy Bruce

LONDON (Reuters) -The Bank of England said on Monday it would not hesitate to change interest rates and was monitoring markets “very closely”, after the pound plunged to a record low and British bond prices collapsed in response to the new government’s financial plans.

Finance minister Kwasi Kwarteng sent sterling and government bonds into freefall on Friday with a so-called mini-budget that was designed to grow the economy by funding tax cuts with huge increases in government borrowing.

Such was the market turmoil on Monday there was growing speculation in financial markets that the BoE would make an emergency interest rate rise after it hiked rates only last week to 2.25% from 1.75%.

Instead, with the pound fragile and bond prices still tumbling, Kwarteng issued a statement just before the British stock market closed to say he would set out medium-term debt-cutting plans on Nov. 23, alongside forecasts from the independent Office for Budget Responsibility of the full scale of government borrowing.

The central bank welcomed “the commitment to sustainable economic growth” from Kwarteng and the independent scrutiny that the OBR growth and borrowing forecasts would bring.

“The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets,” Bank of England Governor Andrew Bailey said.

“The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.”

U.S. Federal Reserve official Raphael Bostic said the market moves could lead to greater economic stress in Europe and the United States, while analysts and investors said the government had done the bare minimum to reassure markets. [nL1N30X1LG]

“There seems no reason to believe that markets will give the government the benefit of the doubt ahead of a new fiscal plan by Kwasi Kwarteng,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

“The market could force their hand and there still could be an emergency rate hike before the next BoE meeting,” he said, referring to the next scheduled policy announcement on Nov. 3.

INTENSE PRESSURE

The Treasury and central bank statements came towards the end of a day of turmoil for Britain’s currency and debt.

While the pound plunged by as much as 5% against the dollar to touch $1.0327, its weakest on record, in Asian trade, it had pared most of the day’s losses in European trading on hopes of an emergency rate hike. [GBP/]

The statement at the close of trading on Monday pushed the pound back to as low as $1.0645 from $1.0820. Sterling was trading at $1.0680 at 1644 GMT, down 1.6% on the day.

In the market for British government bonds, or gilts, the pressure had been even more intense, with five-year bond prices recording their joint-biggest daily fall since at least 1991, matching Friday’s historic slump.

The five-year gilt’s yield – the cost for the British government of new borrowing over five years – reached its highest since September 2008 at 4.603%, and has risen a full percentage point in the last two trading days as Prime Minister Liz Truss’s government lost credibility with investors.

“The reaction to the proposed plan is a real concern and a fear that the new actions will add uncertainty to the economy,” Atlanta Fed President Bostic told the Washington Post.

“The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the U.S. economy is going to perform.”

With markets remaining hugely volatile, British lenders Halifax, Virgin Money and Skipton Building Society withdrew mortgage products from the market.

Gilt yields showed little reaction to the BoE and government statements, but very short-term interest rate swaps slashed the odds of an emergency rate rise in the coming week.

Mohamed El-Erian, chief economic adviser at Allianz, had earlier said the central bank would have no choice but to raise interest rates if Truss and Kwarteng did not back down.

“And not by a little, by 100 basis points, by one full percentage point to try and stabilise the situation,” he told BBC Radio.

Truss, Britain’s former foreign secretary, was elected as prime minister earlier this month by a vote of the Conservative Party’s 170,000 members – not the broader electorate – after an internal party rebellion that drove Boris Johnson out of power.

She largely beat her rivals to the top job by vowing to reignite economic growth through tax cuts and deregulation to bring an end to the largely stagnant real wage growth that has marked her party’s 12 years in government.

Her pledge to end so-called “Treasury orthodoxy” and go for growth marked a step change in British financial policy, harking back to the Thatcherite and Reaganomics doctrines of the 1980s.

“Markets go up and down,” one veteran Conservative Party source said on Monday, declining to be named. “We did something structural, short term, that will have seismic and positive long term benefits.”

Further highlighting the extent to which investors have punished UK assets, the difference in 10-year borrowing costs for the British and German governments exploded to its widest since 1992, when Britain crashed out of the European Exchange Rate Mechanism.

British 10-year government bond prices are now on track for their biggest slump in any calendar month since at least 1957, according to a Reuters analysis of Refinitiv and BoE data.

(Writing by Kate Holton and Amanda Cooper; additional reporting by Muvija M, Elizabeth Piper, Kylie MacLellan, Andy Bruce and Harry Robertson; Editing by Hugh Lawson, Mark Potter, Toby Chopra and Alexander Smith)

London’s FTSE 100 kept afloat by gains in consumer staples

By Johann M Cherian and Susan Mathew

(Reuters) -London’s mid-cap index closed at near two-year lows on Monday as investors fretted about Britain’s new economic plan, but a pound at record lows and gains in consumer staples stocks helped stem falls in the bluechip index.

The mid-cap index extended losses to the third straight session with real-estate and consumer stocks leading declines.

The pound came slightly off lows as traders waited to see if the Bank of England would intervene to ease concerns that the government’s economic plan unveiled last week will stretch the country’s finances to the limit.

“The Chancellor’s generous budget giveaway may not be as useful as he makes it seem, with the Bank of England expected to combat the subsequent inflation and sterling decline by hiking faster and higher,” said IG senior market analyst Joshua Mahony.

Stock markets globally have taken a hit as major central bank attempt to control surging inflation by tightening monetary policy.

The export-oriented FTSE 100 was flat, having hit over six-month lows earlier in the session.

Lifting the consumer staples sector was Unilever, up 1.8% after it said chief executive Alan Jope would retire at the end of 2023, announcing the move less than a year after a bungled attempt to buy GSK’s consumer healthcare business.

Most other sectors lost ground amid recession worries.

“The worry is that not only will borrowing balloon to eye watering levels, but that the fires of inflation will be fanned further by this tax giveaway (in the government’s new plan), which offers higher earners the bigger tax break,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

Persimmon and Berkeley Group Holdings dropped 6.6% and 4.9% after Jefferies cut price targets on each of the homebuilder’s stocks.

Pendragon Plc jumped 19.8% after its largest shareholder made an unsolicited offer to buy the British car dealer for about 406 million pounds ($429.67 million)

(Reporting by Johann M Cherian and Susan Mathew in Bengaluru; Editing by Savio D’Souza, William Maclean)

UK housing index at 11-year low on rate-hike fears

By Yadarisa Shabong

(Reuters) -Britain’s homebuilders index hit a more than 11-year low on Monday on concerns that a weaker pound could lead to more rate hikes by the Bank of England, potentially hurting house prices and demand.

The pound plunged to a record low against the dollar early on Monday and British bonds were slammed on concerns over the government’s fiscal plan, unleashing calls for the Bank of England to deliver an immediate rate hike to restore investor confidence.

“(It’s) more to do with massive rate hikes killing the sector,” Markets.com analyst Neil Wilson said.

The housebuilders index fell 6% to hit its lowest level since March 2013.

“The weak pound is driving expectations for further rate increases, which means lower house prices,” Peel Hunt analyst Sam Cullen said.

Taylor Wimpey, Persimmon, Berkeley Group and Barratt fell between 5.0% and 7.5% by 10:41 GMT, pushing them to the bottom of the FTSE 100.

Shares of Taylor Wimpey hit their lowest since 2014, Persimmon since 2016, and Barratt and Berkeley stocks since March 2020.

UK homebuilders, whose shares saw their worst times ever during the 2008-09 global financial crisis, have seen government support come and go over the last few years and have had to contend with several setbacks including Brexit uncertainties and more recently a $5 billion bill, to remove dangerous cladding from buildings following a deadly 2017 London fire.

They got a boost last week after new British Finance Minister Kwasi Kwarteng said stamp duty, a tax on house purchases, would be cut.

However, there have been signs of cooling in the housing market and fears remain of an impending downturn in the sector, as a worsening cost-of-living crisis and a steep climb in mortgage rates cast a cloud over demand.

Taylor Wimpey last month flagged a softer sales rate for July, fanning those concerns.

(Reporting by Yadarisa Shabong in Bengaluru; Editing by Anil D’Silva and Shounak Dasgupta)

Instant View: Britain’s pound crumbles to record lows in firesale of UK assets

LONDON (Reuters) – Britain’s pound plunged to record lows on Monday and bonds were slammed for a second day, as investors punished UK assets after the government’s mini-budget announcement last week.

On Friday, finance minister Kwasi Kwarteng announced he was scrapping the country’s top rate of income tax and cancelled a planned rise in corporate taxes – all on top of a hugely expensive plan to subsidise energy bills for households and businesses.

British government bond yields ripped higher in response, rising by the most in a single day in decades on Friday, as investors ditched gilts, while London-listed blue chips hit their lowest since early March.

Kwarteng on Sunday dismissed the freefall in the pound, saying his strategy was to focus more on longer-term growth and not short-term market reaction.

In Asian trading on Monday, the pound fell by as much as 5% against the dollar at one point to a low of $1.0327, its weakest at least since the introduction of decimalisation in the early 1970s.

Pound slumps and UK borrowing costs surge https://fingfx.thomsonreuters.com/gfx/mkt/jnpweqgjbpw/Pasted%20image%201664186514397.png

MARKET REACTION:

FOREX: Against the dollar, sterling was last down 1.4% at $1.07045, while against the euro, the pound was down 0.8% at 89.95 pence.

STOCKS: The FTSE 100 fell 0.7%, under pressure from steep losses in shares of homebuilders.

BONDS: Two-year gilt yields were last up 54 basis points at 4.53%, while 10-year yields rose 30 basis points to 4.13%

COMMENTS:

MARK MCCORMICK, GLOBAL HEAD OF CURRENCY STRATEGY, TORONTO DOMINION BANK, TORONTO:

“The crux of the issue is that the macro policy mix will continue to push real yields lower in the face of a rising current account deficit. Sterling has long relied on the kindness of strangers to backstop the current account deficit, but the price action illustrates the market’s rejection of the evolving macroeconomic policy mix.”

MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ:

“There is only two choices for the country, one is (Kwarteng) moderates his package. This is not about the structural reforms enhancing growth and productivity, the markets will like that, nor is about energy stabilisation, this about the extra tax cuts that were introduced and that should surprise the markets on Friday.

“So choice number one is that he recalibrates his package, politically difficult but economically needed. Choice number two is he leaves it to the Bank of England and in that case the Bank of England would have to hike in an emergency meeting because they don’t meet again until November. But that in itself goes against him. Again the image of driving a car with the chancellor foot on the accelerator and the governor foot on the brake. That is not a good way to drive the UK economy.”

YOU-NA PARK-HEGER, CURRENCY STRATEGIST, COMMERZBANK, FRANKFURT:

“Last week’s minutes of the Bank of England’s meeting made it quite clear that in its fight against inflation the BoE is putting some hope in fiscal policies. Measures such as the energy price cap, which will come into effect in October, could weaken inflation pressure and thus ease pressure on the BoE to fight inflation in a more determined manner.

“However, the sterling moves recorded on Friday and especially this morning illustrate that this is not so easy. The presentation of the mini-budget was received quite badly by the markets – sterling literally collapsed. The significant tax cuts announced by the Treasury Secretary cause concerns for the currency markets because of rising government debt.”

SAMY CHAAR CHIEF ECONOMIST, LOMBARD ODIER, GENEVA:

“This doesn’t feel like a currency crisis, where the decline in a currency worsens the situation. Sterling needs to decline considering the deficits and the uncertainty around what the Bank of England will do, but at some point, it will fall to a level where the attractive return prospects it creates improves the prospects of economic and financial flows.”

MICHAEL EVERY, STRATEGIST, RABOBANK SINGAPORE

“The British have decided that going back to the 1980s on steroids is the best way to go, and clearly the market is just saying: ‘That’s not going to work,’ on steroids.

“The market is now treating the UK as if it’s an emerging market. And they’re not wrong in terms of the policy response and the naivety of thinking that boosting demand rather than supply is how you deal with a supply-side shock.”

SHAFALI SACHDEV, HEAD OF FIXED INCOME AND COMMODITIES, ASIA, BNP PARIBAS WEALTH MANAGEMENT, SINGAPORE

“It’s quite interesting that you see a G10 currency weakening into a hike expectation. That makes you realise that the market is not very confident about the ability of the UK government to be able to fund their fiscal plans.

“The math of it would imply that something needs to give, whether it’s terms of higher rates, or a weaker pound. And I guess the market is taking a very calculated bet that that is going to be the case.”

PAUL MACKEL, GLOBAL HEAD OF FX RESEARCH, HSBC, HONG KONG

“The movements over the last couple of trading days are quite fierce.

“Normally you would think about a very strong fiscal package raising interest rate expectations should be positive for a currency, but this time around we’re not seeing that. We’re seeing the exact opposite.

“What has happened in the last 48 hours or so, it’s a strong reminder about how suddenly the drivers for exchange rates can change.”

KIT JUCKES, HEAD OF CUFRRENCY STRATEGY, SOCIETE GENERALE, LONDON

“Markets have a tendency to overshoot and I wouldn’t overinterpret the fall this morning.

“But there are two points. One is the loss of confidence in UK fiscal policy and that won’t help sterling. The second is that the mini-budget has allowed sterling to be the short of choice against the dollar.”

LEE HARDMAN, CURRENCY ANALYST, MUFG, LONDON

“The outsized market reaction to the UK government’s fiscal stimulus plans send a clear signal that market participants have lost confidence in the appropriateness of domestic policy settings in the UK.”

PAUL DALES, CHIEF UK ECONOMIST, CAPITAL ECONOMICS, LONDON

“The further fall in the pound in early trading mean that we’ve now reached the point where the Bank of England needs to step in in order to regain the initiative. There are a couple of ways it could do this.”

“First, Governor Bailey could come out this morning emphasising the Bank’s commitment to the 2% inflation target and providing a clear signal that it intends to raise interest rates aggressively at the next policy meeting in early November.”

“If this were coordinated with a message from the government that it is committed to long-term fiscal discipline and will bring forward plans to spell out how it intends to keep the public debt position stable following last week’s fiscal splurge, then it could relieve some downward pressure on the pound.”

(Reporting by London Markets Team; Editing by Karin Strohecker and Alex Richardson)

FTSE 100 hits 3-month closing low after new economic plan spooks investors

By Sruthi Shankar

(Reuters) -UK’s FTSE 100 hit three-month closing lows on Friday after Britain’s new finance minister Kwasi Kwarteng unveiled historic tax cuts and spending plans to boost the economy, but knocked market sentiment as investor concerns grew over a huge increase in borrowing.

Kwarteng announced an economic agenda designed to thrust Britain out of a cycle of stagnation and into a new era of higher economic growth – but with a hefty bill attached.

The internationally focussed FTSE 100 closed down 2.0% at it lowest level since June 17. The index fell as much as 2.5% to hit a six-month trough earlier in the session.

The domestically focussed FTSE 250 index also dropped 2.0% to hit near two-year lows.

The plan included scrapping the country’s top rate of income tax and an increase in the corporation tax rate. Kwarteng said Britain will spend about 60 billion pounds ($67 billion) on subsidising gas and electricity bills for the next six months for households and businesses.

“Inflationary headwinds continue and with this tax cut giveaway potentially only adding to inflationary concerns, it makes the Bank of England’s job of cooling rising costs even harder,” said Charles Hepworth, investment director at GAM Investments.

“The good news is that the Bank at least retains its independence, for now.”

UK’s homebuilder stocks fell 1.3% after getting a brief boost from the government’s plans to cut stamp duty to help families afford to buy homes. It is among UK’s worst performing sectors this year as rising rates sparked worries about affordability.

A survey showed the downturn in British businesses steepened this month as they battled soaring costs and faltering demand, hammering home the rising risk of recession.

“We’re very cautious about cyclical equities. We need to see PMI get to trough levels rather than the downward trajectory that we’re on at the moment,” said Roger Jones, head of equities at London & Capital.

Data earlier showed British consumer confidence slid this month to its lowest level since records began in the mid-1970s.

Oil and mining majors were the biggest drags on the FTSE 100 as commodity prices weakened against a strong dollar. [O/R] [MET/L]

Among single stocks, Burberry fell 4.6% after the luxury group said Chief Financial Officer Julie Brown was planning to step down in April.

Smiths Group rose 1.3% after the industrial technology group provided an upbeat full-year 2023 forecast.

Made.com plunged 20.0% after the online furniture retailer said it was cutting jobs and mulling options including a sale as it struggles with a steep fall in consumer spending and supply chain snags.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Anil D’Silva, Jonathan Oatis and Shailesh Kuber)

Britain’s finance minister unveils “mini budget”, UK markets pummelled

LONDON (Reuters) – British finance minister Kwasi Kwarteng on Friday unveiled a broad set of measures aimed at cutting taxes and energy bills for households and businesses to try to drive economic growth that would require a huge increase in borrowing.

UK gilt yields surged by the most in a day in well over a decade as the UK Debt Management Office laid out plans for additional issuance to fund the planned spending, while the pound hit new 37-year lows against the dollar.

Britain’s blue-chip stocks remained mired in the red, in line with a broader equity-market decline.

MARKET REACTION:

BONDS: Two-year gilt yields rose by nearly 50 basis points at one point, to a high of 3.997%, set for their biggest one-day rout since late 2009, while five-year yields soared by half a percent, marking their largest one-day rise since the early 1990s.

FOREX: Sterling dropped 1.7% on the day to around $1.1064, having hit a new 37-year low earlier on.

STOCKS: The FTSE 100 was last down 2.1% on the day, around its lowest since early March, in the immediate wake of Russia’s invasion of Ukraine. But not all sectors were under water. British homebuilders and household goods makers rallied, buoyed by the prospect of consumers getting extra cash via tax breaks.

COMMENTS:

BROWN BROTHERS HARRIMAN FX STRATEGISTS, NEW YORK:

“(Prime Minister Liz) Truss is taking a huge gamble. While tax cuts are very popular with the Tories and helped her win the leadership, we suspect it will end up being a harder sell for the general populace if the economic outlook continues to deteriorate.

“The next general election is due by January 2025 and this long-term fiscal experiment may end up in tears over the next 12-18 months. For now, the market is voting with their feet as sterling tumbles and gilt yields spike. This is only likely to get worse.”

BETHANY PAYNE, GLOBAL BOND PORTFOLIO MANAGER, JANUS HENDERSON INVESTORS:

“As things stand this is the biggest move in five year gilts in ten years. This huge fiscal event is a radical economic gamble; a ‘Go big or go home’ gamble that will put UK debt on an unstable footing.

“We had been concerned over the ability of the Bank of England to sustainably sell gilts through the quantitative tightening due to start on 3 October, but today we are asking whether quantitative tightening is over before it even began.”

MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON:

“It seems that the bounce on higher-gilt yields was little more than a short-lived sugar rush for the pound, with the reality of higher borrowing, and a larger budget deficit now starting to sink in. The tax-cutting budget and ‘go for broke’ growth aims are unlikely to change the longer-term bearish GBP trend.”

DAVID PAGE, HEAD OF MACRO RESEARCH, AXA INVESTMENT MANAGEMENT, LONDON:

“The market reaction is of course the most interesting. This is clearly something that suggests a significant amount of extra gilt borrowing, but at the same times it’s fiscal stimulus at a time when the Bank of England is already worried about aggregate demand being too high, and it’s highly likely to force the Bank of England to raise rates even more than we thought they were going to otherwise.

“In terms of sterling, the reaction is more interesting. If you get more fiscal stimulus and less monetary stimulus, that’s something that’s buoyant for the currency. But one also has to look at the current account deficit, which is now not going to narrow quite as much. So there is a question mark over the UK’s external position which questions the longer-term position of sterling.”

MUBIN HAQ, CHIEF EXECUTIVE, ABRDN FINANCIAL FAIRNESS TRUST:

“Today’s mini-budget delivered mini gains for those living on the margins, but maximum rewards for those with the highest incomes and significant assets. Our research shows 4.4 million households are already in serious financial difficulties and few see their prospects for being able to pay their bills improving.

“Help should have been laser focussed on those hardest-hit by the cost of living crisis as the economy enters into recession.”

CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP, LONDON:

“The Chancellor (and the new PM) appear to be betting the house on an economic rebound following on from his tax cuts and changes to planning. But while shareholders in housebuilders might be cheering, the new government has driven a coach and horses through the next few years of planning assumptions.

And the move to remove the top rate of tax gives Labour an easy shot at the next election, especially when the bonus cap removal is taken into account too. Gilt yields are up even in the minutes after the statement, showing that the government will have to pay more for its borrowing, a clear sign of market unease.”

TREVOR GREETHAM, HEAD OF MULTI-ASSET, ROYAL LONDON, LONDON:

“Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary global financial crisis, when borrowing costs were low and private sector balance sheets were deleveraging. 

“Now with spare capacity non-existent, inflation at a forty year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride.”

(Reporting by London Markets Team; Editing by Dhara Ranasinghe and Amanda Cooper)

UK’s JD Sports cautious on outlook as cost pressures weigh (Sept. 22)

(This Sept 22 story corrects to note company has about 3,400 stores, not over 900 stores, in paragraph 6)

By Aby Jose Koilparambil

(Reuters) – Britain’s biggest sportswear retailer JD Sports struck a cautious tone on Thursday amid concerns inflation could push up costs and as strikes at ports add to supply chain challenges.

The company’s comments come amid soaring energy and other costs in Britain, with fashion retailers Primark and ASOS and online grocer Ocado Retail all warning about profits.

JD Sports Chief Financial Officer Neil Greenhalgh told Reuters that, as its products are mostly shipped from Asia, the industrial action at ports in Felixstowe and Liverpool, among others, had aggravated supply chain problems.

JD, which sells global brands including Nike, Adidas and Reebok as well as private labels such as Pink Soda and Supply & Demand, said sales in the UK, mainly online, softened in August and early September as customers were slow to take up heavier autumn products such as sweatshirts and tracksuits while the weather remained relatively warm.

Greenhalgh said cheaper private label items were likely to do better than other brands and clothing range “Technicals” was the best performer in that segment.

JD, which has about 3,400 stores worldwide, said sales so far in the second half of its financial year were up 8% year-on-year. It reiterated its forecast that profit for the year to Jan. 28, 2023 would be in line with the record performance a year earlier.

Shares in the FTSE 100 company fell as much as 8% to 113.95 pence, their lowest in three weeks, before paring losses to trade 4% lower as of 0830 GMT. They were still the top percentage loser on the blue-chip index.

Pretax profit fell 18% to 298.3 million pounds ($335.3 million) for the six months ended July 30, while revenue climbed 14% to 4.42 billion pounds.

($1 = 0.8897 pounds)

(Reporting by Aby Jose Koilparambil in Bengaluru; Editing by Devika Syamnath and Mark Potter)

European shares slide to over 1-1/2 year lows on slowdown fears

By Shreyashi Sanyal, Johann M Cherian and Susan Mathew

(Reuters) – European shares slumped 1.8% on Thursday, as recession worries heightened after the U.S. Federal Reserve delivered another jumbo-sized interest rate hike and signalled more in its fight against stubbornly high inflation.

The pan-European STOXX 600 index hit its lowest since February 2021 led by rate-sensitive tech and real estate stocks which fell more than 4% each, with the latter hitting over two-year lows.

The Fed signalled more hikes after delivering its third 75 basis points hike of the year on Wednesday, and sounding less hopeful of a soft-landing for the U.S. economy.

Markets have had to reckon with several central bank decisions this week, including hawkish moves from Sweden, Switzerland, the United Kingdom, and intervention in Japan.

“(Thursday’s decline) is a follow through from last night’s Federal Reserve meeting,” said Giles Coghlan, chief market analyst at HYCM. “Markets are trying to digest all of the central bank action of the last 24 hours.”

“Stock traders are seeing higher interest rates coming across, not only the U.S. but also the UK and Europe. So there isn’t much reason for stock traders to take encouragement.”

European Central Bank board member Isabel Schnabel said interest rates need to keep going up as inflation is still far too high, even as the euro zone faces an economic downturn.

The STOXX 600 eyed its second straight month of falls as Europe grapples also with an energy and cost of living crisis amid the Russia-Ukraine war hampering gas flows. With potential blackouts during the winter, analysts predict a deeper recession for the euro area.

Data on Thursday showed euro zone consumer confidence fell by a more than expected 3.8 points in September from August.

“In the very short term we are very bearish on euro zone stocks… because they have big risks during the winter in terms of energy and geopolitics,” said Xavier Chapard, strategist at La Banque Postale Asset Management.

London’s FTSE 100 index dropped 1.1% after the Bank of England hiked rate by 50 bps and said it would continue to “respond forcefully, as necessary” to inflation, despite the economy entering recession. [.L]

Travel and leisure stocks slid 3.2%, with French hotel group Accor tumbling 6.9% after J.P.Morgan downgraded to “underweight” on concerns about profitability.

Spanish bank Sabadell rose 5.0% after it received indicative bids from France’s Worldline, Italy’s Nexi and U.S. firm Fiserv for its payments arm, which sources said was valued at up to 400 million euros ($393.64 million).

($1 = 1.0160 euros)

(Reporting by Shreyashi Sanyal, Johann M. Cherian and Susan Mathew in Bengaluru; Editing by Saumyadeb Chakrabarty and Lisa Shumaker)

UK midcaps at over 2-month lows after BoE hikes interest rates

By Bansari Mayur Kamdar

(Reuters) -UK shares fell on Thursday, with the midcap index touching the lowest in over two months on recession fears after the Bank of England joined several global central banks in hiking interest rates to tame inflation.

The blue-chip FTSE 100 index closed down 1.1% at a three-week low, while FTSE 250 index, more exposed to the domestic economy, fell 2.1% to its lowest since July 5.

The Bank of England raised its key interest rate to 2.25% from 1.75% and said it would continue to “respond forcefully” to inflation as needed even though the economy risks being in a shallow recession already.

“The Bank of England delivered in line with expectations,” said Sanjay Raja, senior UK economist at Deutsche Bank Research.

“The door is now open for a bigger hike in November, with the MPC explicitly acknowledging that should their updated outlook points to more persistent inflationary pressures, including from stronger demand, the Bank stands ready to respond forcefully.”

The BoE estimates Britain’s economy will shrink 0.1% in the third quarter – partly due to the extra public holiday for Queen Elizabeth’s funeral – which, combined with a fall in output in the second quarter, meets the definition of a technical recession.

Investor confidence in British assets sits on the edge of a precipice ahead of new finance minister Kwasi Kwarteng’s fiscal update on Friday, according to a Reuters poll earlier this week.

“The MPC expects the fiscal messages to be announced by the government tomorrow to be inflationary over the medium term and it is firing a warning shot that if too much is given away, rates will simply be raised higher,” said Stuart Cole, head macro economist at Equiti Capital.

UK’s rate-sensitive bank stocks slipped 1.5% as the prospect by higher rates was overshadowed by the economic gloom.

Capping some of the losses on the commodity-heavy FTSE 100, mining stocks such as Glencore, Rio Tinto and Anglo American rose between 0.8% and 2.3% as metal prices gained on a weaker dollar and optimism that stimulus measures would boost demand in top metals consumer China. [MET/L]

JD Sports fell 8.4% after UK’s biggest sportswear retailer reported lower profit for the first half.

(Reporting by Bansari Mayur Kamdar and Sruthi Shankar in Bengaluru; editing by Uttaresh.V, Sriraj Kalluvila, Anil D’Silva and David Gregorio)

Sterling surrenders some gains after BoE rate hike

By Joice Alves

LONDON (Reuters) -Sterling gave up some improvement against the dollar and the euro on Thursday after the Bank of England raised its key interest rate by less than the money market was predicting.

The BoE raised its benchmark rate by 50 basis points (bps) to 2.25% as it targets consumer inflation near 40-year highs, and vowed to “respond forcefully, as necessary” to rising prices, despite the British economy entering recession.

While economists polled by Reuters were expecting a 50 bps rise, the money market saw a strong possibility of 75 bps.

The pound eased back from earlier highs after the BoE’s decision, trading up 0.4% on the day against the dollar at$1.13135, having briefly traded with a 0.85% gain.

Against the euro, sterling reversed earlier gains and fell, before flattening at 87.23 pence, after briefly rising to a one-week high of 86.95 pence before the decision.

“Clearly, a dovish surprise as markets were almost fully pricing in a 75 bps increase. However, the fact that three MPC members voted for 75 bps may be preventing a big dovish repricing in the pound curve and that may be one of the reasons why the pound has not dropped much after the announcement,” Francesco Pesole, FX strategist at ING, said.

The BoE’s Monetary Policy Committee (MPC) voted 5-4 to raise rates to 2.25%, with Deputy Governor Dave Ramsden and external MPC members Jonathan Haskel and Catherine Mann voting for an increase to 2.5%, while new MPC member Swati Dhingra wanted 2%.

This summer, rising interest rates have provided little support to sterling amid a gloomy outlook for Britain’s economy and a cost of living crisis.

The pound has softened 16% against the dollar this year, slipping to a fresh 37-year low in early London trading.

The BoE estimates Britain’s economy will shrink 0.1% in the third quarter, partly due to the extra public holiday for Queen Elizabeth’s funeral. Combined with a second quarter fall in output this meets the definition of a technical recession.

“Since May it has been clear that BoE rate hikes are not having much of an impact in halting downside pressure on sterling with UK fundamentals undermined by slow growth, a huge current account deficit and recently by concerns over the fiscal outlook,” Jane Foley, head of FX strategy at Rabobank in London, said.

(Reporting by Joice Alves; Editing by Amanda Cooper and Alexander Smith)

Stocks gyrate, dollar gains as Fed keeps hawkish stance

By Herbert Lash

NEW YORK (Reuters) – U.S. stocks rose, then slumped while Treasury yields surged and then fell on Wednesday as markets reacted wildly to a bleak economic picture next year after the Federal Reserve adhered to a tough stance to fight inflation by jacking up interest rates.

The three main stock indices jolted up and down, the yield on benchmark 10-year Treasury notes spiked to 3.6401% and the dollar surged to a fresh two-decade high after the Fed raised rates by 75 basis points as expected.

The Fed also said in a statement following a two-day meeting of policymakers that it expects its policy rate to hit 4.4% by year’s end and rise to 4.6% by the end of 2023.

The Fed’s aggressive drive to lower inflation to its 2% target will take years and comes at a cost of slower growth and higher unemployment, according to projections from policymakers that cast doubt on market hopes for a “soft landing.”

The projections show Americans are in for some pain as the U.S. central bank works to end inflation and prevent what Fed Chair Jerome Powell has said would otherwise be even worse outcomes.

“The Fed reset the expectations in order to eliminate counterproductive speculation by market participants of a pivot, for now,” said Johan Grahn, head of ETFs at Allianz Investment Management LLC in Minneapolis.

“It’s a logical action by a ‘Volcker-courageous’ Fed, but one that they can walk back at a later date if needed,” Grahn said, referring to former Fed chief Paul Volcker, who tamed double-digit inflation four decades ago by inducing a recession.

Stocks on Wall Street tried to rally several times, without luck. After 10 years of abnormally low rates, investors have yet to figure out how to position their portfolios, said Carol Schleif, deputy chief investment officer at BMO family office in Minneapolis.

“It takes a while to anchor to the new normal,” Schleif said. “Investors keep wanting to hear something more positive, and they weren’t hearing that positive tilt they wanted.”

Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Wellesley, Massachusetts, said the equity market was a little bit too optimistic that the Fed might soften its language.

After the the past four meetings of the Federal Open Market Committee, stocks rallied only to fall the following day.

“A lot of times you see (the market) do something on the day of and then something else the next day. Investors might want to reserve judgment until tomorrow,” Hazen said, when stocks were trading higher on the day.

Graphic: Fed’s four-meeting streak snapped https://graphics.reuters.com/USA-STOCKS/egpbkrdbxvq/chart.png

The Dow Jones Industrial Average closed down 1.7%, the S&P 500 lost 1.71% and the Nasdaq Composite dropped 1.79%. After an initial negative reaction, markets mostly shrugged off Russian President Vladimir Putin accusing the West of “nuclear blackmail,” remarks that sparked a flight to safe-haven assets like gold and bonds.

The pan-regional STOXX 600 index in Europe closed up 0.90% after earlier sliding to its lowest level since early July when Putin announced the military mobilization. MSCI’s gauge of stocks worldwide fell 1.55%.

The 10-year Treasury yield fell 5.7 basis points to 3.516% after a big spike following the Fed statement. Two-year yields were last at 4.0506%, after earlier hitting 4.123%, the highest since October 2007.

The closely watched yield curve between two- and 10-year notes inverted further to minus 53 basis points, indicating concerns about a recession in the next year or two.

The dollar index rose 1.026%, with the euro down 1.27% to $0.9843. The Japanese yen weakened 0.19% versus the greenback at 143.98 per dollar,

Oil prices fell after the Fed hiked rates to quell inflation as it may also reduce economic activity.

Brent crude futures settled 79 cents lower at $89.83 a barrel, its lowest close in two weeks, while U.S. West Texas Intermediate (WTI) crude fell $1.00 to $82.94, its lowest close since Sept. 7.

U.S. gold futures settled up 0.3% at $1,675.70 an ounce.

Bitcoin was mostly flat, up 0.04% at $18,886.00.

(Reporting by Herbert Lash, additional reporting by Caroline Valetkevitch and Sinéad Carew in New York; Editing by David Gregorio and Jonathan Oatis)