- FTSE 100 resumes downard path, down 54 points
- Markets price in an emergency rate increase
- US markets seen lower
12.40pm: US markets seen lower
Heading into the afternoon and London’s blue-chip index was trading lower while the pound fell further as the fall out to chancellor Kwasi Kwarteng’s fiscal announcements continued with markets now pricing in an emergency interest rate increase.
By 12.40pm the FTSE 100 was down 57 points at 6,691, while the broader FTSE 250 slumped 264 points to 17,709.
Sentiment was set for a further hit this afternoon with US markets likely to open lower as worries of a prolonged recession grip global markets.
Sharp currency market fluctuations are also adding to market fears, as the US dollar surges against the likes of the pound and euro.
Futures for the Dow Jones Industrial Average were down 0.8% in pre-market trading, while those for the S&P 500 lost 0.8%, and contracts for the Nasdaq-100 were 0.6% lower.
The dust has yet to settle on the Federal Reserve’s third 75 basis point interest rate hike last week and markets are contending with the prospect of a tough recession. Investors are spooked and show little appetite for risk.
The result has been lower stock prices, especially as the Federal Reserve underlined its commitment to keep hiking interest rates last week as it attempts to tame inflation, which remains close to 40-year highs.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, noted that the “extremely chaotic note” on currency markets is not helping.
12.05pm: OECD predicts no growth in the UK next year
The global economy will suffer a US$2.8 trillion (£2.6t trillion) hit next year in the wake of Russia's war in Ukraine, according to an international policy forum that is predicting zero growth for the UK.
The Organisation for Economic Cooperation and Development (OECD) said its projection for lost output worldwide was based on a comparison between its pre-invasion forecast and its latest projections.
The report said economic growth worldwide was slowing more than expected as energy prices spike and the resulting inflation crisis takes its toll on demand.
While global growth this year was still expected at 3%, it is now projected to slow to 2.2% in 2023.
That was down from a forecast in June of 2.8% - with Europe accounting for much of the decline.
The OECD was particularly gloomy about Germany's Russian-gas dependent economy, forecasting it would contract 0.7% next year, slashed from a June estimate for 1.7% growth.
The report warned that further disruption to energy provision in the EU would push many countries into recession.
The bad news added to the overall prevailing gloomy mood in the market with the FTSE 100 now down 54 points.
11.15am: Emergency rate rise priced in but politics may triumph
It may not be Wednesday but the falls in sterling today and on Friday are bringing back uncomfortable memories of that “black” day when chancellor, Norman Lamont, scrambled to support the value of the pound raising interest rates twice in one day.
Money markets are now pricing in an emergency rate hike with 175 basis points’ worth of increases by November as investors expect Bank of England governor, Andrew Bailey to intervene to prop up the ailing pound.
Victoria Scholar, head of investment at Interactive Investor said: “ It looks like an emergency rate hike is on the cards as the Bank of England scrambles to bring inflation back down closer to target and calm the currency crisis.”
Simon Harvey, head of FX analysis at Monex Europe, said: “The risk of the Bank of England intervening has increased sizeably and we now look for an inter-meeting announcement in the early part of this week.”
Mohamed El-Erian, an adviser to Allianz (ETR:ALVG), has said the Bank of England should hike interest rates by one percentage point if Chancellor Kwasi Kwarteng doesn't reserve the measures in his mini-budget.
He told BBC Radio 4: "If I were the governor and the chancellor is not modifying his plan, I would increase interest rates and not by a little, by 100 basis points, by one full percentage point to try and stabilise the situation."
But it may not be that straightforward as the conflicting worlds of economics and politics collide.
The Bank of England governor is likely to come under intense pressure from the chancellor to hold off an emergency rate rise for now which politically could prove ruinous.
Going back to 1992 the Major government never recovered its reputation for economic management after it hiked the bank rate briefly to 15% in September 1992, in a vain attempt to keep the UK in the exchange rate mechanism.
Samuel Tombs, chief UK economist, at Pantheon Macroeconomics, said he thinks the markets are overestimating the chance that governor Bailey will call an emergency meeting this week.
He said Bailey won’t rush, “but will speak to the press or issue a statement in order to provide reassurance that the MPC will hike the bank rate by a very large increment—we now expect a 75bp hike—in November.”
He added “The risks, therefore, are tilted towards a further depreciation of sterling in the near term.”
10.40am: Investors regard the UK government as a "doomsday cult" - UBS
Paul Donovan, chief economist of UBS Global Wealth Management was scathing in his analysis of the economic moves by the UK government likening its actions to that of a “doomsday cult.”
“The global signals from the UK’s mini-budget matter” he said, adding “Modern monetary theory has been taken into a corner by the bond markets and beaten up.”
“Advanced economy bond yields are not supposed to soar the way UK gilt yields rose.”
“This also reminds investors that modern politics produces parties that are more extreme than either the voter or the investor consensus. Investors seem inclined to regard the UK Conservative Party as a doomsday cult.”
MMT takes a pounding - https://t.co/BY5xwZXz76 via @UBS— Paul Donovan (@PDonovan_econ) September 26, 2022
He said tax cuts are unlikely to give the UK a meaningful medium-term boost with “a short-term “sugar high” likely but may be limited.”
10.05am: Housebuilders tumble on fears of higher rates
Housebuilders tumbled on concerns that interest rates will rise a lot higher than previously forecast to support the plunging pound and deal with inflationary pressures.
At 10.00am four of the top five fallers in the FTSE 100 were all housebuilders – Taylor Wimpey PLC (LON:TW) (down 4.3%), Persimmon PLC (LON:PSN) (down 4.26%), Berkeley Group Holdings PLC (BKG) (down 3.87%) and Barratt Developments PLC (LON:BDEV) (down 3.08%).
In the FTSE 250 Bellway PLC (LON:BWY) (down 3.8%) was also sharply lower.
9.30am: Oil prices fall
It's not just sterling that's under pressure today, oil prices have also fallen back.
Benchmark Brent crude fell below $85 a barrel for the first time since January, mirroring recent losses for West Texas Intermediate.
It comes amid mounting concerns over a global economic slowdown with rising interest rates, Russia's invasion of Ukraine and continued Covid lockdowns in China all denting supplies and fuelling fears of lower demand.
8.55am: FTSE 100 up, pound down but off lows
FTSE 100 extended its gains in early trading but Friday’s statement by the chancellor continued to pile pressure on the pound while bond yields also jumped pushing up the cost of government borrowing.
At 8.55am London’s blue chip index was up 22 points at 7,041 with the broader FTSE 250 down 48 points at 17,924.
Exporters and dollar earning stocks benefited from the weakness in sterling – Diageo PLC (LON:DGE), Reckitt Benckiser Group PLC (LON:RKT) and Unilever PLC (LON:ULVR) were amongst the beneficiaries.
The pound has moved off its earlier lows but is still down 1.3% against the US dollar trading around US$1.07.
Analysts are speculating whether the Bank of England will have to intervene to support sterling ahead of its next scheduled meeting.
Mohamed El-Erian, an advisor to Allianz (ETR:ALVG), told the BBC’s Today programme that the Bank of England should hike interest rates by one percentage point if British finance minister Kwasi Kwarteng does not reverse the measures in his mini budget that have thrown markets into a tailspin.
"If I were the governor and the chancellor is not modifying his plan, I would increase interest rates and not by a little, by 100 basis points, by one full percentage point to try and stabilise the situation."
Bond yields have jumped in early trading, pushing up the cost of Government borrowing as markets baulk at the UK's fiscal plans.
Yields on two-year gilts have surged 55 basis points to 4.5pc, while the 10-year is at 4.1pc.
Goodness. Gilts are getting slammed against a wall. Yields up 20BPS across THE ENTIRE CURVE pic.twitter.com/MhmijEFtlp— David Ingles (@DavidInglesTV) September 26, 2022
Back to equities and housebuilders fell on the prospects of further increases to interest rates with Persimmon PLC (LON:PSN), down 2.4%, Taylor Wimpey PLC (LON:TW) down 2.33%, Vistry PLC down 2.8% and Crest Nicholson (LON:CRST) down 2.87% amongst those suffering.
Shares in RPS Group (LON:RPS) PLC jumped 12% after the group said it had agreed a bid approach from Tetra Tech (NASDAQ:TTEK), Inc. valuing the business at £636mln, trumping a £591mln ofer from consultancy giant, WSP.
Under the terms of the bid the Californian based consultant will pay 222p per share to acquire Oxfordshire headquartered firm.
8.10am: FTSE 100 opens higher
FTSE 100 opened higher, recovering some of the losses from Friday, but sterling remained under pressure hitting a record low earlier in Asia-Pacific markets before recovering slightly.
By 8.10am the lead index was up 23 points at 7,042 as the weak pound boosted dollar earning companies while the broader FTSE 250 continued to fall, trading down 104 points at 17,868.
The falls in sterling have put more pressure on the Bank of England to intervene and increase interest rates ahead of its next scheduled meeting.
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown (LON:HRGV) said: “The fresh bout of panic appears to have been brought on by rumours that the Bank of England may step in with an emergency rate hike to try and shore up support.”
Oil major, BP PLC (LON:BP.) fell 1% as Brent Crude prices dipped 1.8% and on a reported rating downgrade by JPMorgan (NYSE:JPM) to hold from buy.
Pendragon PLC rose 20% after receiving an unsolicited and highly conditional proposal from Hedin Mobility Group regarding a possible cash offer which would value each Pendragon share at 29p.
The group said it was considering the proposal and urged shareholders to take no action at this time.
7.40am: Fall in sterling may force Bank to intervene
Analysts and politicians are suggesting the Bank of England will have to intervene and raise interest rates before its next scheduled meeting to prop up the ailing pound.
Simon Harvey, head of FX analysis at Monex Europe, said: “The risk of the Bank of England intervening has increased sizeably and we now look for an inter-meeting announcement in the early part of this week.”
“The question policymakers will be debating over is how large the interest rate hike needs to be in order to clot the bleed in financial markets.”
“With 75bps quickly priced in for November’s meeting, we’d argue that 50bps will be the minimum needed to turn the tide.”
“The sick irony of this is that the weaker the pound gets, the more expensive the government’s liabilities become.”
Shadow Chancellor Rachel Reeves told Times Radio: ““I started my career as an economist at the Bank of England and like everyone else I’m incredibly worried about what we’ve seen, both on Friday with market reactions to the chancellor’s so-called mini-budget, and also the reactions overnight.”
“It also puts more pressure on the Bank of England to increase interest rates” she said.
7.15am: Sterling hits new low
Sterling hit a record low against the US dollar in Asia-Pacific trading, extending the losses suffered on Friday, and moving closer to parity, following the min budget on Friday and with the UK chancellor pledging over the weekend to pursue more tax cuts.
The pound plunged nearly 5% at one point to around $1.0327, a record low since at least decimalisation in 1971, as belief in the UK’s economic management and assets evaporated.
IT HAPPENEDThe pound just plunged to the lowest EVER level against the US dollar, lower even than the 1985 nadir.
Touched $1.037 before rebounding slightly. Now at $1.0569. pic.twitter.com/iiAyAOJkT8
— Ed Conway (@EdConwaySky) September 26, 2022
The pound’s drop was driven by “growing concerns about the UK’s policy credibility”, says Alvin Tan of RBC Capital Markets.
Tan also flags the speculation that the Bank of England might be forced to raise interest rates to strengthen sterling.
He said: “GBP/USD tumbled to a record low below 1.04. There is also increasing speculation about an emergency BoE rate hike.”
7.00am: FTSE 100 seen slightly higher
FTSE 100 is expected to open slightly higher this morning after a bruising end to last week and despite losses in Asian markets overnight.
Spread betting companies are calling London’s blue-chip index up by around 17 points.
All eyes will be on the pound when the European trading day begins. Sterling fell to an intraday low of US$1.0349 earlier Monday, its worst ever level against the dollar.
In the US on Friday US markets suffered heavy losses at the close, as the CBOE Volatility Index — Wall Street's "fear gauge" — rose above 30.
The S&P 500 lost 1.7% to finish at 3,693 points; the Nasdaq sank 1.8% to hit 10,868 points, and the Dow fell 1.6% to reach 29,590 points - a new 2022 low.