- FTSE 100 slightly lower, gilt yields rise
- Position of prime minister, Liz Truss, seen as untenable
- Deutsche Bank (ETR:DBKGn) cuts price targets for UK housebuilders
10.35am: Schroders take £21bn hit from pensions crisis
Schroders PLC (LON:SDR), one of the City’s best know names, saw its assets under management drop by £21bn in the third quarter reflecting the crisis which enveloped the industry during the recent financial turmoil.
Britain's biggest standalone asset manager said assets dropped to £752.4 billion from £773.4 billion in the three months to the end of September.
More than £20bn of the decline came from the firm's Solutions business, which houses its so-called liability-driven investment strategies where assets under management fell to £205.5 billion from £225.7 billion.
Schroders is one of several asset managers to offer LDI investment strategies that typically use derivatives to help pension funds match their assets with their liabilities.
But the results only capture a week of the turmoil that ripped through financial markets following Kwasi Kwarteng’s disastrous min-budget.
Shares in Schroders recovered early losses to trade broadly unchanged by 10.30am.
10.05am: BoE's Broadbent says MPC will respond promptly to UK fiscal policy
Bank of England deputy governor Ben Broadbent has said it ‘remains to be seen’ whether UK interest rates have to rise as much as the markets predict.
Speaking at Imperial College London, Broadbent explained that the economy has been hit by severe real shocks.
“The pandemic raised the global demand for goods and reduced their supply; Russia has cut back severely its supply of gas to Europe. These have had dramatic effects on relative prices.”
“In particular, import prices have risen significantly compared with the price of UK output. This has unavoidably depressed real incomes: the volume of output may have just about recovered to pre-Covid levels but its consumption value has not.”
Broadbent said that the Bank’s Monetary Policy Committee will respond promptly to news about fiscal policy adding that the justification for tightening monetary policy is clear.
⚠️ BoE's Broadbent: If Bank Rate were to reach 5.25% [as markets expect]... then the impact on GDP would be -5%... of which only around one quarter has already come through.Buckle up. This isn't going to end well $GBP pic.twitter.com/HJL6KzWxAe
— Viraj Patel (@VPatelFX) October 20, 2022
He also estimated that if the Bank Rate were to reach 5.25% [as markets expect] then the impact on GDP would be -5%, of which only around one quarter has already come through.
9.30am: Yen hits lowest level against US dollar since 1990
The yen tumbled past the key psychological level of 150 to the dollar on Thursday for the first time since 1990, defying Japanese policymakers' repeated threats of intervention to address excessive currency market volatility.
The dollar/yen's break above the key milestone heightens pressure for Tokyo to step into the currency market again to rein in the Japanese unit's relentless decline.
Earlier in the day, Japanese Finance Minister Shunichi Suzuki vowed to take "appropriate steps" against excessive currency market volatility.
BREAKING | Yen falls below 150 per dollar, hitting new 32-year lowhttps://t.co/4grYGSrFJ6#Yen— Nikkei Asia (@NikkeiAsia) October 20, 2022
9.00am: FTSE flat, Deutsche slashes housebuilder price targets
The FTSE 100 remained slightly lower in early trading with political events continuing to grab attention with the uncertainty prompting renewed nervousness on the bond markets.
At 9.00am London’s blue-chip index was down 1 point at 6,924, while the FTSE 250 was 59 points lower at 17,189.
Bond yields rose in reaction to the political chaos with the 2-year gilts yield at 3.56%, up from 3.45% and the 10-year gilt up a similar amount and yielding close to 4%.
Neil Wilson at Markets.com said “Liz Truss’s government is hanging by a thread after the resignation/sacking of Home Secretary Suella Braverman. If it looks like a coup and smells like a coup, then surely it is a coup, right? Chairman Hunt is in charge, if anyone could be said to be in control of this unholy mess.”
Away from politics, housebuilders were once again in focus knocked by a sector review by Deutsche Bank which slashed price targets across the sector.
Analysts at investment bank said the housing market is in a state of flux- mortgage rates have tripled; loans are less available and future refinancings will be painful.
As a result, broker said it has had made major cuts to estimates, now predicated on lower house prices, reduced volumes and stubborn build cost inflation.
However, it said falls of c50-60% year to date leaves share prices at steep discounts to NAVs and that after a brutal sell off, Deutsche believes much is now in the price and a relief rally lies ahead.
The rating and price target changes are as follows: Berkeley Group Holdings PLC - Buy to Hold, target 5535p to 3807p; Bellway PLC (LON:BWY) - Hold to Buy, target 3289p to 2167p; Barratt Developments PLC (LON:BDEV) - Buy, target 835p to 462p; Crest Nicholson PLC (LON:CRST) - Buy, target 416p to 235p; Persimmon PLC (LON:PSN) - Hold, target 2854p to 1207p; Redrow PLC (LON:RDW) - Buy, target 784p to 499p; Taylor Wimpey PLC (LON:TW.) - Buy, target 186p to 115p; Vistry Group (LON:VTYV) - Hold, target 1241p to 710p
On the upside, luxury fashion brand Burberry Group (LON:BRBY) PLC rose 1% following well-received results from French peer Hermes.
8.40am: Gilt yields rise again
The political chaos and economic uncertainty in the UK weighed on the bond market today with the cost of government borrowing rising once again.
Yields on two-year gilts jumped to around 3.6% up from 3.5% last night, while 30-year bond yields have risen to 4.06%, from below 4%. There were similar increases in the 5 and 10-year gilts as well.
Bill Blain, strategist at Shard Capital, said the markets are watching events “in a kind of stunned, open-mouthed horror.”
He told Radio 4’s Today programme that the last couple of weeks have destroyed the image of political competency – which is a key element to make any economy work.
8.15am: FTSE 100 opens lower as political turmoil takes centre stage
FTSE 100 opened slightly lower reflecting falls in the US and Asia and as political turmoil continued in the UK with the position of the prime minister, Liz Truss, seen by many as untenable.
At 8.10am the lead index was down 14 points at 6,911, while the broader FTSE 250 slipped 73 points to 17,175.
More Conservative MPs called on the prime minister to quit with Crispin Blunt telling the BBC “It’s plain what is required. We need to effect a change, frankly, today in order to stop this shambles.”
Of the PM’s position he said it was “Wholly untenable. And if she doesn’t understand then I would be astonished.”
Shares in Bunzl PLC (LON:BNZL) slipped 1.33% despite the group stating that despite "a slowing macroeconomic environment", full-year guidance remained unchanged at constant exchange rates, with the firm expecting to deliver "very good revenue growth in 2022.
The distribution and services group said on Thursday that its "diversified and resilient business model" had delivered "strong growth", with quarter three group revenues up 18.8% at actual exchange rates and 8.7% at constant exchange rates.
Homeware chain Dunelm (LON:DNLM) PLC, which has enjoyed years of strong growth, reported an 8% drop in sales in the last quarter.
The group posted sales of £357mln for the 13 weeks to 1 October, while gross margins fell compared to last year, although it is seeing a “very good response” from customers to its seasonal “winter warm” products including rugs, curtains and blankets.
Nick Wilkinson, Dunelm’s chief executive officer, warned that the landscape is demanding as shoppers face a tough winter: “As we enter what will clearly be a challenging winter for consumers, our absolute focus remains on making every pound count for everyone, through a tight grip on operations.”
Shares fell 1.25% to 795.50p.
7.55am: More MPs call for Truss to go
Tory MPs are in full mutiny mode with more and more openly calling for the prime minister, Liz Truss, to go.
Crispin Blunt said Liz Truss should never have put herself forward for leadership - and should quit today. He told BBC Radio 4 Today’s programme “It’s plain what is required. We need to effect a change, frankly, today in order to stop this shambles.”
Of the PM’s position he said it was “Wholly untenable. And if she doesn’t understand then I would be astonished.”
Tory MP Crispin Blunt says Liz Truss should never have put herself forward for leadership - and should quit today.He tells @BBCr4today: “It’s plain what is required. We need to effect a change, frankly, today in order to stop this shambles.”
— Pippa Crerar (@PippaCrerar) October 20, 2022
Simon Hoare told the same programme that the government is engaged in “hand to hand” combat to survive - and could collapse as early as today.
“Can the ship be turned round? Yes, but there is about 12 hours to do it,” he added.
He said “I think today, tomorrow are crunch days” adding he felt “anger, despair, sadness” as “good work which has been done over recent years appears to be dissolving before our eyes”.
There was a “growing sense of pessimism in all wings of the Tory party,” he cautioned.
7.46: Sterling continues to fall against the US dollar, euro fights back
Cable continues to fall in the latter half of the week despite gilt yields easing off. Currently changing hands at US$1.14, the pair is seeing a modicum of support on the one-hour chart, though the US dollar is unlikely to give in to any significant degree.
Despite incremental support on the one-hour chart, the pound continues to struggle – Source: capital.com
The euro is looking buoyant in the morning’s Asia trading hours, including against the Swiss franc, with the EUR/CHF pair adding another 0.2% to bring the exchange rate up to six-week highs of 0.98 francs.
EUR/USD has added around 30 pips, though at slightly below US$0.98, the pair has a while to go before clawing back all of yesterday’s losses.
The EUR/GBP pair is basically in the same position against the day at 87p, and with nothing of note on today’s economic calendar save inevitable turmoil in the UK parliament, is unlikely to budge much from this price point.
USD/JPY is getting seriously close to the 150 yen threshold, which will undoubtedly trigger a second intervention by the Bank of Japan in order to get the country’s plummeting currency under control.
The Aussie dollar is looking bearish against the rest of the G10 set.
7.43am: Oil prices rise as China debates change to Covid rules
Oil prices pushed higher today as Chinese officials debate easing some Covid rules.
Benchmark Brent crude gained 0.63% to just above $92 a barrel while West Texas Intermediate jumped 1.2pc to trade at around $85.50.
Officials in Beijing are said to be debating whether to reduce the amount of time people coming into the country must spend in isolation.
Any easing of China's zero-Covid strategy would boost expectations of higher demand, though concerns over a global economic slowdown and the prospect of further output cuts by Opec are still weighing.
7.30am: UK hospitality sector slumps in September - Lloyds (LON:LLOY)
Tourism and recreation experienced the fastest fall in output of any UK business sector last month, according to a report out today.
Output in the sector, which includes pubs, hotels and restaurants, declined at the fastest pace since February 2021, when the UK was last in lockdown, with a tracker score of 36.3 in September, according to the Lloyds Bank UK Recovery Tracker. Any reading below 50 indicates contraction.
The drop was caused by demand falling for a fourth consecutive month – to a tracker score of 38.5 last month – as consumers reined in spending amid rising inflation.
However, five of the 14 UK sectors that make up the tracker reported faster growth in output in September, compared with just three the previous month. A tracker reading above 50 indicates expansion.
Output growth was highest among software service providers at 55.8, down from 63.1 in August, followed by healthcare firms, rising to 53.6 from 47.8.
The tracker showed that overall input cost inflation for businesses intensified in September for the first time since May. The increase was driven by rising energy prices for manufacturers, which exceeded a previous peak during the 2008 oil price shock.
Jeavon Lolay, the head of economics and market insight for commercial banking at Lloyds, said: “While we expect UK inflation to remain stubbornly high in the coming months, there are clear signs of an easing in pipeline cost pressures in our latest UK Sector Tracker report.”
7.00am: FTSE 100 seen slightly lower after falls in the US
FTSE 100 is expected to open slightly lower after falls in the US and Asia and as the UK is enveloped in further political chaos with the position of prime minister, Liz Truss, under threat.
Spread betting companies are calling the lead index down by around 6 points.
US markets closed lower on Wednesday, giving back some of the gains of the past two days.
At the close the S&P 500 was down 25 points, or 0.66%, to 3,695, while the Nasdaq Composite fell 92 points, or 0.85%, to 10,861 and the Dow Jones fell 100 points, or 0.33%, to 30,424.
Back in the UK the government appeared to be on the brink of collapse after another chaotic day yesterday which saw the acrimonious resignation of the home secretary, Suella Braverman, mayhem in the Commons over a fracking vote, and confusion over whether the chief and deputy chief whip had quit.
The farcical scenes in the House of Commons, with allegations of manhandling and intimidation by Tory whips, were described as an "absolute disgrace", by Charles Walker, a former vice-chair of the 1922 Committee of backbench MPs.
On the corporate front, trading updates are expected from AJ Bell PLC (LSE:AJB), Bunzl PLC (LSE:BNZL), Dechra Pharmaceuticals PLC (LON:DPH), Dunelm Group PLC (LSE:DNLM) and Travis Perkins (LON:TPK) PLC amongst others.