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FTSE 100 opens sharply lower after heavy falls in the US and ahead of Bank of England rate decision

Published 22/09/2022, 08:11
Updated 22/09/2022, 08:41
© Reuters.  FTSE 100 opens sharply lower after heavy falls in the US and ahead of Bank of England rate decision

© Reuters. FTSE 100 opens sharply lower after heavy falls in the US and ahead of Bank of England rate decision

Leading shares have slumped in the wake of Wall Street's falls following the hawkish Federal Reserve comments and ahead of the Bank of England's own rate decision at midday.

Many expect a 75 basis point rise from the Bank but Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said it could opt for 50: "Yes, increased spending from Liz Truss government is no good for inflation, but, because the [announced] £40 billion energy package aims to tame inflation – and it certainly will, the BoE could take it easy on the rate front."

Even so this will take rates to their highest level since the end of 2008 amid the financial crisis.

The monetary policy committee will also have to take into account the mini-budget tomorrow which is expected to unveil hefty spending plans, including tax cuts.

Ozkardeskaya said: "The BoE is also expected to announce quantitative tightening, but the effect of QT will certainly remain under the shadow of huge sums that Truss government is preparing to spend. On top of the energy spending, there could be a £30 billion tax cuts, and also a stamp duty cut. It is said that the Chancellor of Exchequer will certainly need a bigger box to finance all that.

"What does it mean for the markets? It means that the UK gilts will probably further dive, and the sterling will end up hitting parity against the US dollar."

The Bank has at least had the chance to digest the Fed's comments - originally the UK central bank was due to announce last week before its US counterpart, but the meeting was postponed due to the period of mourning for the Queen's death.

As well as the focus on central banks, there also continue to be jitters following the aggressive comments from Russian president Putin and the mobilisation of troops he announced.

So the FTSE 100 is down 69.97 points or 0.97% to 7167.67 in early trading, more than wiping out Wednesday's gains.

And on the currency markets the pound fell as low as US$1.1212 this morning but has recovered a little to US$1.122, still down 0.299% and a new 37 year low.

7.00am: FTSE set for hefty losses at the open

The FTSE 100 is expected to open sharply lower following heavy falls in the US after the Federal Reserve slashed economic growth forecasts as it raised interest rates by 75 basis points once again.

Investors will be looking to see if the Bank of England follows a similar path today when it makes its interest rate announcement, with markets expecting at least 50 basis points with 75 a distinct possibility, the biggest rise for 33 years.

Spread betting companies are calling London’s blue-chip index down by 60 points.

US markets ended a see-saw final couple of hours sharply lower as the Federal Reserve signalled that interest rates would stay higher, for longer, and slashed its forecasts for economic growth for the next two years.

The rate increase of 75bp was as expected but it was the accompanying hawkish remarks and estimates that further spooked the markets.

At the close, the Dow Jones was down 523 points, or 1.7%, at 30,184, the S&P 500 shed 66 points, or 1.7%, to 3,790, and the Nasdaq Composite tumbled 205 points, or 1.8%, to 11,200.

Michael Hewson, chief market analyst at CMC Markets UK, said: "Fed chair Jay Powell [said] that the FOMC were “strongly committed” to driving inflation lower while signalling that more rate rises are on the way. Powell went on to say that there was no painless way to drive inflation lower, with the prospect that we could well see another 100bps by the end of this year at the bare minimum.

"Not surprisingly US equity markets did not like the hawkish tone, as well as the prospect of lower growth and higher inflation, with the Fed altering its guidance on both. US GDP is expected to slow to 0.2% in 2022, with Powell admitting that a recession might be possible. Core inflation is forecast to decline to 4.5% this year, before falling to 2.1% by 2025."

Read more on Proactive Investors UK

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