EVENING UPDATE London’s FTSE 100 was down 1.06% and the FTSE 250 was down 1.29% amid continued fears over Britain’s gilt market and its effect on large pension funds.
The Bank has said it will buy further government bonds, including index-linked gilts, in an effort to avoid a sell-off which could lead pension funds to collapse.
In a statement, Threadneedle Street said, “The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.
Markets slumped in the wake of the Bank of England’s move – its second intervention in two days.
MORNING UPDATE London’s FTSE 100 closed down 0.45% and the FTSE 250 closed down 1.31%, as traders remained skittish about this week’s news from the U.S.
Traders were braced for big news from the U.S. including retail sales, inflation figures and the minutes of the latest Fed meeting in America, which could offer crucial hints about how the U.S. central bank handles inflation.
Craig Erlam, senior market analyst at Forex group Oanda said, “We’re seeing mild risk aversion in the markets at the start of the week, perhaps some apprehension ahead of what could be a big few days for the US.
“It’s a big week for the US, with the Fed minutes also being released on Wednesday and retail sales on Friday. Earnings season also kicks off later this week which will offer crucial insight into how corporate America views aggressive monetary tightening and the outlook for the economy. I don’t expect it will be a particularly upbeat few weeks.”
The Bank of England has announced it will now offer to buy up to £10 billion of gilts per day, as its £65 billion emergency bond-buying plan is set to expire on Friday October 14.
Threadneedle Street intervened to prop up the Government bond market in the wake of Kwasi Kwarteng’s mini budget.
But yields on 30-year-gilts rose to their highest level since before the bank’s intervention hints that there could be further turmoil ahead.
Antoine Bouvet, senior rates strategist at ING, said: “The suspicion is that risk reduction by pension funds has been too limited so far.
“The question is do they have enough cash to meet new collateral requirements if the gilt market sells off again, as the gilt purchases by the Bank of England end this week. I think the fear is that the answer’s no and that it will trigger the same snowball effect that we had two weeks ago.”
DS Smith (GB:SMDS) saw stock rise by 12% after it increased its annual profit guidance to be higher than previously announced expectations – with “very strong” revenue growth and “effective cost mitigation” helping it drive more profits.
British business news today
Gilts sell off as Bank of England fails to ease market (FT)
IMF veteran calls for immediate emergency rate rise (Telegraph)
House prices could drop 12% by 2024, analysts warn (Daily Mail)