Europe

Market mayhem as FTSE 100 drops after Truss insists no cuts

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The City’s main stock market index continued to fall in midday trading today down 42 points to 6843, a fall of 0.61 percent. The midcap index came under pressure as a slide in housing stocks after Barratt Developments’ disappointing results added to worries over a bond market selloff that has kept investors on edge.

The midcap FTSE 250 index dropped 0.1 percent. It fell as much as two percent earlier in the day to hit its lowest since May 2020.

Meanwhile, sterling rose 0.9 percent in a volatile session after Bank of England (BoE) Governor Andrew Bailey told pension funds they had three days to fix liquidity problems before the bank ends emergency bond-buying which has provided a lifeline.

Reports signalling the BoE could extend bond purchases had previously calmed the mood, but the central bank confirmed gilt purchases will end on Friday.

Shares of rate-sensitive banks, homebuilders and insurers extended losses as gilt yields continued to rise. The 20-year gilt yield rose above five percent for the first time since September 28.

Oliver Allen, senior markets economist at Capital Economics, told Reuters: “While more of the action in terms of this crisis is playing out in the gilt market and the pound, it does seem like UK equities, particularly the domestically focussed companies, are struggling by more than you might expect if it were just global factors weighing on it.

“That makes sense given one sharp feature about this crisis is rise in bond yields. There are worries about the housing market in the UK, and it is posing a darker cloud over the economic outlook.”

Data earlier showed the UK economy shrank by 0.3 percent in August, hit by weakness in manufacturing and maintenance work in North Sea oil and gas fields. It underscored the challenge for Prime Minister Liz Truss in speeding up growth.

Britain’s largest homebuilder Barratt Developments Plc fell 3.7 percent after it said its annual outlook looked “less certain” as homebuyers face rising mortgage rates and a worsening cost-of-living crisis. The wider housing index fell 1.8 percent.

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Ms Truss insisted at Prime Minister’s Questions (PMQs) today (October 12) she will not cut spending to balance the books. It comes as economists and financial markets continue to question her plans.

The Prime Minister said she is “absolutely” not planning public spending reductions, but insisted taxpayers’ money will be used well.

Business Secretary Jacob Rees-Mogg suggested the Bank of England’s failure to raise interest rates in line with the Federal Reserve was driving the turmoil in financial markets rather than Chancellor Kwasi Kwarteng’s mini-budget.

Labour leader Sir Keir Starmer asked Ms Truss whether she agreed with her Cabinet colleague during PMQs.

The Prime Minister failed to respond directly, but said the Government had acted to protect people and firms from soaring energy bills and had taken “decisive action” to make sure the country is not facing “the highest taxes for 70 years in the face of a global economic slowdown”.

She insisted the Government is making sure to protect the economy at a very difficult time internationally.

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Economists have suggested that restoring confidence in the Government’s grip on the national finances will require tens of billions of pounds’ worth of spending cuts or tax rises.

Sir Keir said that during her Tory leadership campaign Ms Truss had pledged “I’m not planning public spending reductions”.

Asked if she is going to stick to that, she replied: “Absolutely… We are spending almost £1trillion of public spending. We were spending £700billion back in 2010.

“What we will make sure is that over the medium term the debt is falling. But we will do that not by cutting public spending but by making sure we spend public money well.”

Gerard Lyons, an economist who in the past offered advice to Ms Truss, said it was incorrect to suggest the mini-budget was the sole cause of the market turmoil. However, he did say the Government did “misread” the situation.

He told the BBC: “I think it’s wrong, since then, in terms of the narrative, that everything that’s happened is solely due to the mini-budget. We should also be asking ourselves, why were markets so febrile ahead of the mini-budget?

“Why was the Bank of England seen by the markets as being so far behind the curve in terms of controlling inflation? Indeed, in terms of the problems that have emerged with the pension funds, they highlight how vulnerable parts of the financial system and, indeed, possibly the economies we might see in coming months are to interest rates rising.

“So, I think there are a whole combination of factors, but at the same time one has to say that the mini-budget itself did misread the situation.”

Bank of England (BoE) Governor Andrew Bailey said on Tuesday on the sidelines of an IMF meeting in Washington that the Bank’s support for pension funds would end as planned on Friday.

A BoE spokesperson said today it had been made “absolutely clear” to banks at senior levels that the deadline would hold, after the Financial Times cited sources as saying it might be extended.

The 20-year UK Government bond yield hit its highest in 14 years at 5.141 percent today. 

Craig Inches, head of rates and cash at Royal London Asset Management, told Reuters: “To a global investor the UK looks a mess and therefore global investors don’t want to step in and buy yields at attractive levels until the UK gets its house in order.”

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