Global stocks and government bonds tumbled as the boost wore off from the Bank of England’s intervention on Wednesday to support UK government debt markets.
Wall Street’s benchmark S&P 500 dropped as much as 3 per cent, touching its lowest level since November 2020, before recovering to close 2.1 per cent lower on Thursday. The Nasdaq Composite, which is dominated by tech groups that are regarded by investors as particularly sensitive to higher interest rates, tumbled 2.8 per cent.
Investors have become increasingly concerned about the impact of high rates and the prospects for global economic growth since the US Federal Reserve and a host of other central banks raised rates last week. Data on Thursday showed the number of Americans filing for unemployment benefits over the past week hit its lowest since April. That weighed on Wall Street from the opening bell, as a tight labour market carries risks of inflation becoming entrenched.
A poorly-received “mini” Budget from the UK government last Friday added to the volatility and sent sterling to a record low against the dollar earlier this week. The BoE’s announcement on Wednesday of a £65bn bond-buying programme initially helped calm gilt markets, which had been in turmoil since the “mini” Budget. The central bank’s intervention triggered a rally in UK assets which rippled into other global markets.
However, the supportive effects of the BoE’s response were dissipating on Thursday, as the prices of government bonds fell again. The yield on the UK’s 30-year gilt, which was the focus of Wednesday’s intervention, rose as much as 0.14 percentage points to 4.03 per cent, according to Tradeweb data. Yields rise when prices fall.
In Treasury markets, the policy-sensitive two-year yield jumped 0.08 percentage points to 4.18 per cent, while the benchmark 10-year rose 0.05 percentage points to 3.76 per cent.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said he was sceptical that Wednesday’s rally would “mark an end to the recent period of elevated volatility or risk-off sentiment”.
“For a more sustained rally, investors will need to see convincing evidence that inflation is coming under control, allowing central banks to become less hawkish,” he said.
Europe’s regional Stoxx 600 fell 1.7 per cent on Thursday after ending Wednesday up 0.3 per cent. London’s FTSE 100 lost 1.8 per cent.
In currencies, the pound gained 1.7 per cent against the dollar to trade at $1.1078. An index measuring the dollar against six peers slipped 0.4 per cent, reversing earlier gains.
The dollar has hit fresh 20-year highs in recent months, buoyed by the relative weakness of other currencies, aggressive monetary policy tightening by the Fed and the greenback’s traditional status as a haven in times of economic and market stress.
Analysts at ING said the BoE’s action represented “the first big intervention from a G10 central bank in this cycle to avert a financial crisis. It may not be the last”.
“It serves as a reminder to policymakers around the world that any perceptions by the market of a policy mis-step will be heavily punished,” they added. “With the Fed to keep hiking into a slowdown . . . these conditions may well be with us for the next six to nine months.”