European markets ended the week sharply lower as a bond market rout upended sentiment, sending the Euro Stoxx 50 and DAX to year-to-date lows, erasing July lows in the process.
While it would be tempting to blame some weak flash PMIs, the tipping point appears to have been the announcement of Britain’s latest fiscal stimulus package, which appears to be treated as a high-risk leap of faith, prompting sharp increases in yields on concern about soaring inflation and the risk of recession.
The resulting surge in yields is no better illustrated than in the UK gilt market, which saw the yield on UK 5-year gilts jump over 50 basis points on a record day to over 4% .
With Italian elections also looming this weekend and an expected victory for Italy’s far-right, led by Giorgia Meloni, investors are fleeing all risky assets.
The FTSE100 also fell sharply, falling below 7,000 for the first time in over 6 months, with all sectors except healthcare in the red, and energy and basic resources leading the losses, facing the rising risk of a global recession.
Falling metal prices, as well as oil and gas prices, see weakness in Glencore, Anglo American, Harbor Energy, BP and Shell.
British homebuilders, who initially rose following stamp duty reforms, quickly gave up those gains, fearing spiraling inflation could dampen demand for mortgages and homes.
The best performers were Haleon and GSK, while Smiths Group is is also doing well after reporting annual results that saw its revenue beat expectations, rising 3.8% to £2.56bn.
Profit for the year rose 263% to just over £1bn, although most of it was due to discontinued operations. When that was removed, operating profit was below £117m, but the company was optimistic about the outlook, saying it expected organic revenue growth of 4% to 4.5% over the course of exercise 23.
US markets took inspiration from today’s selloff in European stock and bond markets, opening sharply lower and on course for the second straight weekly loss. On a more positive note, unlike Europe, US markets are still above their June lows, but that may not last long if bond markets continue to sell off.
Weakness in the energy sector acts as the main drag, as US oil prices fall below $80 a barrel, with Exxon and Chevron leading the fallers.
Boeing the shares came under pressure after settling its civil charges with the SEC for misleading investors on the 737 MAX, agreeing to a $200 million sum.
Last week fedex Shares fell sharply after the logistics company issued a profit warning, along with a big loss in revenue and profit. First-quarter revenue was $23.2 billion, below expectations, with the company saying it expects second-quarter revenue to be 4% lower at $23.75 billion . Today, the company went a step further and announced that it will embark on a cost-cutting and price-raising plan as it seeks savings of $2.7 billion. Plans would include reducing flights as well as closing underperforming offices, with markets giving them a cold response, as stocks tumbled.
The US dollar continued to rise, marking a new 20-year high, helped by an improvement in the latest flash PMIs, while the pound sank like a stone following this morning’s budget announcement by the UK Chancellor of the Exchequer.
Against the US dollar, the pound fell below 1.1000, marking a new low in 37 years, and its worst one-day fall since March 2020, with currency and bond markets showing their doubts about the new budgetary strategy of the British government, in a context of rising inflation. While the pound’s decline this week is staggering, it is still just behind that of the Swedish krona, whereas since the start of the year it has been behind that of the Japanese yen and the Swedish krona.
The mood around the pound was already fragile after another record low for consumer confidence in September earlier today, although that should be cautioned that much of this reading may well have been influenced by the lack of detail on the price of energy. bailout. Now we know we could see some improvement in October, although if today’s market rout is any guide, it might be wishful thinking.
Still, today’s weakness was not so much about energy price caps for businesses and consumers, it’s hard to argue for doing nothing about it and given the current environment, the government had little choice.
The sale of bonds and gilts came amid various tax cuts announced in conjunction with the new tax package, as doubts over how they might be paid came to light, along with fears that they could stoke the inflationary fire.
It is this additional borrowing that appears to be spooking bond markets and sinking the pound, and although the Chancellor was at pains to insist it would help launch a plan to hit a 2.5 % of GDP, the markets are not buying it. , with movements in UK gilt yields also causing contagion to bond markets in Europe and the US.
Worries over soaring inflation prompted a sharp sell-off in crude oil, with US prices slipping below $80 a barrel, and their lowest levels since January, on fears that higher yields and central banks will more aggressive policies trigger a global recession.
Brent prices also came under pressure for the same reason, outweighing supply concerns and energy price caps in the EU.
Soaring yields, coupled with a stronger US dollar, unsurprisingly sent the price of gold tumbling to its lowest levels in more than 2 years amid fears of further aggressive rate moves from from the Federal Reserve.
UK natural gas prices are also significantly lower, falling to 3-month lows.
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